"The three most harmful addictions are heroin, carbohydrates, and a monthly salary," said my friend Nassim Taleb, author of Antifragile: Things That Gain from Disorder.
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
Mad Hedge Technology Letter
July 24, 2018
Fiat Lux
Featured Trade:
(SECURE THE GATES),
(FTNT), (PANW)
Does it give you the creepy-crawlies to know that while you are meandering around on your favorite website, nefarious forces are preying on your every click?
An entire industry is devoted to defending your needs, to ensure you can roam and frolic aimlessly on the World Wide Web.
The global cybersecurity industry aimed at protecting the end user is on pace to mushroom, surpassing $180 billion in revenue by 2023, a monstrous uptick in business activity from the $114 billion in 2017.
Recent political sable rattling and aggressive posturing underscores the seriousness of defending proprietary trade secrets and vital data, which are propelling these businesses to outperform.
The multitude of security breaches has fueled a security spending binge in 95% of firms.
And this is just the beginning.
Hyper-accelerating technology has augmented big data as the new oil, and this data is useless if hackers can infiltrate a system leaving it a shell of its former self, then selling it on to the highest bidder on the dark web.
Corporations are furiously spending on the newest cutting-edge fortifications.
CEOs have awoken and realize getting nicked of a precarious treasure trove of data is a sackable offense.
The trend in global cybersecurity spending augurs well for Fortinet (FTNT), a company I have touted in the past. To read my recommendation for this stock click here. Please note you must be logged in to read the article.
I urged readers to dip their toe in this stock when shares were trading at $54 in the middle of March.
The ensuing price action has been nothing short of spectacular with frequent antagonistic macroeconomic headlines boosting the stock.
Fortinet is trading at $68 today, levitating over 20% since I recommended it barely four months ago.
Fortinet has the pulse on the cybersecurity industry and provided some insight to the industry combat zone from its 30,000-foot perch as one of the leading lights of the industry.
This is what it deals with on a daily basis.
Intrusion methods are constantly transforming to keep the cybersecurity forces off-kilter.
The game of cat and mouse has become a zero-sum proposition deploying massive scale. This newfound acceleration is forcing cybersecurity companies to up their game.
The latest data from Fortinet illustrates cybercriminals malware usage has crept up in sophistication relying on formulating modern zero-day vulnerabilities, better understood as attacks exploiting previously unknown security vulnerabilities, operating with lighting quick speed and mammoth scale.
Unique exploit detections surged by 12%, and from these intrusions, 73% of firms were materially damaged.
These aren't your father's cybercriminals.
The newfound mainstream popularity of cryptocurrency has caused a new wave of fiat money to funnel through Internet checkpoints into their crypto brokerage accounts.
This fashionable asset class for Millennials has coincided with a major increase in "cryptojacking," the theft of crypto assets.
The aforementioned malware is becoming uber complex undetectable to the unexperienced cybersecurity professional.
The migration into cryptomining has given cybercriminals another platform to strike it digitally rich.
The activity of cryptomining malware has shot up doubling the amount of malware permeating through the system.
Cryptomining malware has demonstrated a vast array of variations of malware. This brand of stealthier, fileless malware deploys infected, undetectable code into browsers.
Hackers aren't just targeting one type of cryptocurrency. They are going after the alternative currencies such as Dash and Monero that knock about in the crypto asset ecosphere.
Monero is a favorite of the North Korean state hacker team.
Hackers are employing a trial and error strategy, aggregating the industries' best practices to mold into an even more deadly weapon.
These dark forces aren't just spraying around attacks mindlessly. To cause maximum damage, hackers are growingly deploying their venom in a targeted fashion, pinpointing the exact weakness in a system, providing a timely entry point into a gateway allowing them to open a Pandora's box when inside.
Worldwide events are magnets to this bombardment of attacks, and these hackers are routinely carrying out diligent reconnaissance work to lay the groundwork for a laser-like, designed attack.
These digital Ocean's 11 are hard to stop unless you call on Fortinet.
The scope of damage is increasing over time with hackers directing malware to disperse laterally throughout a network before triggering the most vicious phase of the attack.
The Olympic Destroyer malware and the SamSam ransomware rearing its ugly head in Q1 2018, demonstrate how cybercriminals fused together a designer attack with a destructive payload for devastating results.
Some examples of the rapid escalation in expertise are GandCrab ransomware that turned up in January. It was the first ransomware demanding Dash cryptocurrency as a payment.
Complicating the matter, attacks aren't just pointed at one direction. A multifaceted pronged attack has proved effective for expert hackers and mobile is becoming a habitual point of entry.
Hackers would target routers or Internet hardware exploiting these soft spots contributing to 21% of corporations being blindsided by malware, a sharp increase from 7%.
The explosion of IoT devices such as Amazon Echo and Apple's HomePod will be a battleground arena for this industry to stop probing hackers from extracting the treasure trove of data.
Unpatched software and hardware are also ripe for penetration.
Microsoft ranked as the most targeted firm. The other avenue for attacks mainly fell to routers that garnered a substantial portion of malware volume.
Botnets are described as a network of private computers infected with malware while controlled without the owners' knowledge.
Logically, the longer the botnets are in the system, the more havoc they cause.
Same-day detection and removal of botnets came in at 58.5% of infections.
Unfortunately, it took two days to get rid of 17.6% and three days to oust 7.%.
Further down the time horizon, it took more than a week to dispose of 5%.
One glaring example was the Andromeda botnet removed in Q4 2017, but it was still running riot prominently in Q1 2018.
An elixir to solve the problem is not always perfect, but Fortinet manages to successfully smother potential carnage leading to a slew of massive contracts.
All of these aforenoted dangers are on what Fortinet clamps down.
It does its best to put a muzzle on the hideous activity. Then the review and enhancement of products will only help them generate a flurry of sales going forward.
The cybersecurity sector is relatively new and swiftly evolving to the forefront of corporate governance.
The speed of change in technology is outstripping the development of academic qualifications for cybersecurity experts.
Consequently, an acute scarcity of qualified technicians could stifle the effort to combat these wicked forces. Reports suggest a substantial number of middle-tier specialist positions cannot be found causing strain further down the pecking order.
Fortinet uses the most modern A.I. (artificial intelligence) algorithms to address these hyper-critical security threats, whether in networks, applications, cloud, or mobile environments.
The company is the industry leader along with Palo Alto Networks Inc, (PANW), hawking premium firewall technology, end-point security software, and cloud protection solutions.
They have been consistently growing the top line while expanding their hybrid-solutions product lineup.
Just four years ago Fortinet took home $770 million of revenue Fast-forward to 2017, and Fortinet ended the year with $1.49 billion in revenue.
Fortinet continues to hit all-time highs as its stock is on fire.
Its total addressable market maintains robust, and Fortinet is well placed to reap the benefits moving forward.
Its revenue mix is slowly changing from a reliance on hardware to a pivot to software and services boding well for the future.
Gross margins are healthy ticking higher to 77% in Q1 2018, a small increase of 2% YOY.
Revenues are set to blow past $3 billion by 2022, and Fortinet is an all-around great company.
Shares have run too far too fast. Wait for shares to drop anywhere close to the 50-day moving average to put new money to work in this high-caliber cybersecurity stock.
________________________________________________________________________________________________
Quote of the Day
"A company shouldn't get addicted to being shiny, because shiny doesn't last," - said Amazon founder and CEO Jeff Bezos.
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 23, 2018
Fiat Lux
Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS
GLOBAL STRATEGY DINNER),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or IT'S SUDDENLY BECOME CRYSTAL CLEAR),
(SPY), (TLT), (QQQ),
(AMZN), (MSFT), (MU), (LRCX),
(REPORT FROM THE ORIENT EXPRESS)
Maybe it's the calming influence of the sound of North Atlantic waves crashing against the hull outside my cabin door for a week. Maybe it was the absence of an Internet connection for seven days, which unplugged me from the 24/7 onslaught of confusing noise.
But suddenly, the outlook for financial markets for the rest of 2018 has suddenly become crystal clear.
I'll give you the one-liner: Nothing has changed.
Some nine years and four months into this bull market, and the sole consideration in share pricing is earnings. Everything else is a waste of time. That includes the Greece crisis, the European debt crisis that drove MF Global under, two presidential elections, the recent trade wars, even the daily disasters coming out of the White House.
Keep your eye focused on earnings and everything else will fade away into irrelevance. It that's simple.
As I predicted, the markets are stair-stepping their way northward ahead of each round of quarterly earnings reports.
And now that we know what to look at, the future looks pretty good.
The earnings story, led by big tech, is alive and well. After a torrid Q1, which saw corporate earnings grow by a heart palpitating 26%, we are looking for a robust 20% for Q2, 23% in Q3, and another 20% in Q4.
The sushi hits the fan when Q1 2019 earnings grow by a mere 5% YOY as the major elixir of tax cuts wear off, leaving us all with giant hangovers.
Amazon (AMZN), Netflix (NFLX), and Microsoft (MSFT), all Mad Hedge recommendations over the past year, account for 70% of the total market gains this year.
Look at the table below and you see there has only been ONE trade this year and that has been to buy technology stocks. Everything else, such as oil, the S&P 500 (SPY), the U.S. dollar (UUP) has been an also-ran, or an absolute disaster. And we nailed it. Some 80% of our Trade Alerts this year have been to buy technology stocks.
The gasoline poured on the fire by the huge corporate tax cuts are only now being felt by the real economy. Q2 GDP growth could run as hot as 4%. But there is a sneaking suspicion in the hedge fund industry that these represent peak earnings for the entire economic cycle.
Corporate stock buybacks hit a new all-time high in Q2, as companies repatriate cash hoards from abroad at extremely preferential tax rates to buy back their own shares.
Trade wars are certainly a worry. But retaliation is directed only at Trump supporting red states, which accounts for only a tiny share of U.S. corporate profits. Technology stocks, which account for half of all American profits, have largely been immune, except for the chip sector (MU), (LRCX), which has its own cyclical problems.
Yes, we know this will all end in tears. The yield curve will invert in a year, taking short-term interest rates higher than long-term ones, triggering a recession and a bear market. But the final year of a bull market is often the most profitable as prices go ballistic. You would be a fool to stay scared out of stocks by headline risk and an uncertain Twitter feed.
Yes, early leading indicators of a coming recession are popping up everywhere now. A stunning 12.3% drop in June Housing Starts has to be at the top of anyone's worry list, as rising home mortgage rates and disappearing tax deductions take their pound of flesh. It was the worst report in nine months.
The trade wars promise to leave the Detroit auto industry in substantially reduced form, or at least, the stock market believes so. And a 10-year U.S. treasury bond yield that has been absolutely nailed in a 2.80% to 2.90% range for three months is another classic marketing topping indicator.
I'll let you know when it is time to pull up stakes and head for higher ground. Just keep reading the Diary of a Mad Hedge Fund Trader.
As I have been at sea and out of the markets, my 2018 year-to-date performance remains unchanged at an eye-popping 24.82%, and my 8 1/2-year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.
This coming week will be a very boring week on the data front.
On Monday, July 23, there will be nothing of note to report.
On Tuesday, July 24 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.
On Wednesday, July 25 at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST the Fed is expected to raise interest rates by 25 basis points. At 2:30 Fed governor Jerome Powell holds a press conference.
Thursday, July 26, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.
On Friday, July 27 at 9:15 AM EST we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, I am going to attempt to think of more great thoughts this afternoon while hiking up to the Hornli Hut at 11,000 feet on the edge of the Matterhorn, a climb of about 5,000 feet out the front door of my chalet. I always seem to think of my best ideas while hiking uphill. The liter of Cardinal beer and a full plate of bratwurst with rosti potatoes will make it all worth it.
Good luck and good trading.
0
Mad Hedge Technology Letter
July 23, 2018
Fiat Lux
Featured Trade:
(THE SKY IS THE LIMIT),
(NFLX), (FB), (AAPL), (MSFT), (GOOGL)
After Netflix (NFLX) laid an egg, the tech sector badly needed a cure to calm the fierce, open waters.
Netflix missed expectations by about a million subscribers and weak guidance shredded the stock almost 15% in aftermarket trading.
The FANG boat started to rock and large cap tech needed a savior to quell the increasingly downside risk to the best performing sector in the market this year.
You can rock the boat all you want, but when Microsoft (MSFT) shows up, the seas turn tranquil and placid.
Microsoft delivered a dominant quarter.
I expected nothing less from one of the best CEOs in America, Satya Nadella, and his magic touch is the main wisdom behind the loquaciousness when the Mad Hedge Technology Letter delves into the Microsoft business.
I rate Microsoft as a top three technology stock, and it should be a pillar of any sensible equity portfolio, unless you believe throwing away money in the bin is rational.
Born in Hyderabad, India, Nadella has worked wonders inheriting the reins from Steve Ballmer who was more concerned about buying an NBA team than running one of the biggest American companies.
Ballmer had Microsoft barreling unceremoniously toward irrelevancy.
It got so bad for Microsoft, the "L word" started to pop up.
Legacy tech is the lousiest label a tech company can be pinned with, because it takes years and gobs of cash to turn around investor sentiment, the business, and the share price.
Under Nadella's tutelage, Microsoft has burst through to another all-time high, which is becoming a regular occurrence in 2018 for Microsoft's shares that languished in purgatory for years.
If the macro picture holds up and if the administration can keep quiet for a few news cycles, investors can expect a minimum of 15% appreciation per year in this name.
And that is a conservative estimate.
Microsoft is already up over 20% in 2018.
Queue the applause.
Nadella has orchestrated a 300% jump in valuation during his four and half years at the helm.
Microsoft is now valued at more than $800 billion and climbing.
The only other tech members of the prestigious $800 billion club are Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL).
Apple leads the charge to claim the prize as the first trillion-dollar company, and it is within striking distance valued at $951 billion.
Nadella bet the farm on software subscriptions and migration to the cloud.
It was the perfect strategy at the ideal time.
Shares cracked the $108 mark at the market open even as the administration kept up its pugnacious rhetoric threatening to topple the overall market.
Tech has held up through these testy times confirming the fluid migration by the scared investor souls into big cap tech.
How can you blame them?
Amazon prime day saw record numbers visit its platform to the point it crashed from overloading the servers.
Coresight Research predicted users would fork over $3.4 billion on Prime Day in 2018, an increase of 40% YOY.
More than 100 million products were sold in the 36 hours.
The staggering Prime Day sales came on the heels of Alphabet being fined $5 billion for being too dominant in Europe.
The market shrugged it off as the fine does nothing to change Alphabet's dominance in Europe.
Android has harvested 80% of the smartphone market and was slapped on the wrist for bundling Google apps out of the cellophane packaging is a cheap trick by the European regulators.
Imagine frequenting a restaurant that cannot serve its own food.
Alphabet even allows users to download whatever bundle of apps through the Google Play app store. It should be enough.
Alphabet is another solid Mad Hedge Technology Letter pick, albeit it is the weaker tier of the vaunted FANG group and just celebrated all-time highs.
Amazon and Netflix (NFLX) still lead the charge at the top tier of the FANG group, and Facebook's risky business model has it grouped with Alphabet in the lower tier.
At the end of the day, a member of the FANG group is a member of the FANG group.
Microsoft should be part of the FANGs, but the acronyms start becoming too pedantic.
The breadth of the tech sector means many winners.
Microsoft is one of the biggest winners.
Microsoft's total revenue levitated 17% YOY to $30.1 billion.
The number every investor was patiently waiting for were insights into the cloud business.
Microsoft Azure was up 89% YOY and cemented together with strong guidance, ensured Microsoft's shares would continue on its merry way upward.
Gross margins for the commercial cloud offerings, grouped as Azure, Office 365, accelerated to 58% YOY from 52%.
Microsoft's intelligent cloud described by Nadella as "Microsoft's drive to build artificial intelligence into all its apps and services" rose 23% YOY to $9.6 billion.
Management said that it expects Cloud margins to ameliorate through the rest of 2018.
Even the hardware side of the operations caught an updraft with Microsoft Surface, a series of touchscreen Windows personal computers, pole vaulted by 25% YOY.
Simply put, Microsoft is a lean, mean cash-making machine. Last quarter's profit of $8.87 billion coincided with the first time the company eclipsed $100 billion in annual sales.
Microsoft Azure's 16 percent share of the global cloud infrastructure market, according to data by research firm Canalys in April, is rapidly approaching Amazon's Amazon Web Services (AWS) business.
A Morgan Stanley poll of 100 U.S. and European CIOs gleaned insight into the broad-based acceptance of Microsoft's products.
The poll saw 34% planned to upgrade to a higher and more expensive tier of Office 365 software in the next two years, and more than 70% plan to deploy Microsoft Azure and its collection of hybrid cloud solutions.
Microsoft still has its cash cow business injecting healthy profits into its business with Microsoft's productivity and business processes unit, including Office 365, rising 13.1% YOY to $9.67 billion.
The tech sector needs the mega cloud stocks to stand up and be accountable at a precarious time when the macro picture is doing its best to suppress the robust tech sector.
Amazon and Alphabet are in the limelight next week, and Amazon will divulge frighteningly strong cloud numbers along with the braggadocio numbers about its record-breaking Prime Day.
The more I look at Microsoft's last quarter performance, it becomes harder and harder to identify any chink's in Microsoft's armor.
This is not your father's Microsoft.
This is the flashy, innovative Microsoft on top of the most influential trend in the technology sector - the migration to the cloud.
Sticking to this stock could be the rich new uncle of which you've always dreamed. But in this case, it's Satya Nadella providing the free flow of funds.
The spike in the shares is well deserved and any remnant of a retracement should be bought with two hands.
Saying that I am bullish about Microsoft's prospects is an understatement.
________________________________________________________________________________________________
Quote of the Day
"Your margin is my opportunity," said founder and CEO of Amazon Jeff Bezos.
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