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
August 15, 2018
Fiat Lux
Featured Trade:
(WHY BONDS CAN'T GO DOWN),
(TLT), (TBT), ($TNX), (TUR), (TSLA),
(HOW TO MAKE MORE MONEY THAN I DO),
(AMZN), (LRCX), (ABX), (AAPL), (TSLA), (NVDA)
Mad Hedge Technology Letter
August 15, 2018
Fiat Lux
Featured Trade:
(HOW TO PLAY THE NEW FORTNITE GAMING FAD),
(ATVI), (EA), (AMD), (NVDA), (MSFT), (AAPL), (GOOGL), (TWTR), (SNAP), (FB), (SPOT), (GAMR)
By now, most of you have figured out that I love calling readers every day and milking them for ideas on how to improve my service.
Often, they think I am an imposter, a telephone salesman, a machine, or an algorithm. It's only after listening for a few seconds that they recognize my voice from the biweekly strategy webinars and realize that it's the real me.
I don't do this to get renewals, because everyone renews anyway. Where else do you get a 62% annual return with no serious drawdowns?
No, I do it because the information I pick up from subscribers is golden. Some of my best Trade Alerts are inspired by reader questions.
One of my favorite Einstein quotes is that "There are no stupid questions, only stupid answers."
In fact, I have discovered that a lot of subscribers are making much more money from my service than I do.
I'll tell you how they do it.
First, let me remind readers that every Trade Alert I send out includes recommendation for a call or put option spread, a single stock, or an ETF.
The trading performance charts that we published are based on the options spread positions only.
WARNING: What worked swimmingly over the past 10 years is no guarantee that it will work next year, but I thought you'd like to know anyway.
1) Raise the Strike Prices
Move the strike prices up by a dollar. So instead of buying the Barrick Gold (ABX) September $15-$16 deep in-the-money vertical bull call spread, you pick up the $16-$17 call spread instead.
Generally, you make a profit that is 50% greater on this higher spread than with the original recommendation. But you are also taking on higher risk.
When 90% or more of our Trade Alerts are successful this has been a pretty good bet to make.
2) Buy the Call Options Only
Instead of buying the call spread, you buy the call option only in half the size.
When it works, your upside is unlimited. When it doesn't, you just write off the total value of your investment.
This is a great approach when the stocks I recommend take off like a rocket and double or more, as have Apple (AAPL), Amazon, (AMZN), Tesla (TSLA), Lam Research (LRCX), and NVIDIA (NVDA).
Option spread buyers leave a lot of money on the table with this scenario, but get lower performance volatility.
I have observed that many of my Australia readers pursue this approach, as they are fighting a 14-hour time zone disadvantage with the New York Stock Exchange. Not many civilians want to trade at 4:00 AM no matter how much it pays.
The payoff is that they earn about double what I do trading the same stocks.
3) Buy a 2X or 3X Leveraged ETF
This is moving out even further off the risk curve.
Almost every one of the 101 S&P 500 sectors have listed for them 2X and 3X bull and bear ETF's. In theory, the best-case scenario for one of these funds is that they will rise three times as fast as the underlying basket.
In theory, I said.
By the time you take out management fees, tracking error, and execution costs, and wide spreads, you are more likely to get 2.5 times the basket appreciation, if not 2X.
I normally steer investors away from 3X funds. But 401k traders, who are not allowed to deal in stock options, swear by them.
4) Trade Futures
This is a favorite of foreign exchange, precious metals, and bond traders. A futures contract can deliver up to 100 times the performance of the underlying currency, metal, or Treasury bond.
Get a good entry point, run a tight stop loss, and the potential gains can be astronomical.
Every year we get a couple of followers who earn 1,000% profits using our market timing for entry and exit point, and they always do it through the futures markets. Yes, that is a 10X return.
This is also a much higher risk, but higher return strategy. Your broker will present greater disclosure requirements and need a higher clearance level.
But potentially retiring in a year is ample bait for many professionals to go through with this.
5) Read the Research
I know a lot of you only buy this service only for our industry beating Trade Alert service.
But my decade-long experience in watching readers succeed, or fail, in their executions is that the more research they read, the more money they make.
Don't try to skim though with a minimal effort.
It's really very simple. The more work you put into this, the more profit you take out.
Understanding fully what is happening in the markets, indeed the entire global economy, will give you the confidence you need to take on bigger positions and make A LOT more money.
There is no free lunch. There is no Holy Grail.
Having said all that, good luck and good trading.
Each generation grows up in its own unique environment.
Childhood experiences differ more and more as the world rapidly changes because of hyper-accelerating technology.
Millennials are usually defined as children born between 1981 to 1996.
They were the last generation to grow up outside breathing crisp, fresh air and meandering around the neighborhood with their friends looking for excitement.
Generation Z is the first generation in America generally raised indoors because of their overwhelming preference and broad-based addiction to technology.
Social media stocks have been a huge winner from this new paradigm shift in the behavior of young adults.
Instead of running around the block in packs, children are laser focused on these platforms communicating with the entire world and propping up their social lives.
Children meet a lot less than they used to and convening on a social media platform of choice has become the new normal.
Platforms such as Twitter (TWTR), Instagram and Snapchat (SNAP) have convincingly won over these new eyeballs even so much so that the new "going out" is congregating on Snapchat with a group of friends.
Facebook (FB) is now considered a legacy social media platform full of millennials and the older crowd.
Generation Z do not fancy drugs or drinking like the youth before them, rather, their panacea is video games and a lot of them.
These new societal trends will hugely affect your portfolio going forward.
A battle royal game is a video game category mixing the survival, exploration and scavenging elements together with last-man-standing gameplay.
These types of games predominantly contain 100 players sharing the same experience on a broadband connection.
This genre has been all the rage with PlayerUnknown's Battlegrounds (PUBG) piling up 400 million gamers across the globe selling 50 million copies of the game.
Of the 400 million gamers, 88% access the game via mobile devices highlighting the vigorous shift to mobile for younger generations.
PUBG made more than $700 million in sales in 2017.
The rise of the billion-dollar video games is alive and well.
In fact, Activision Blizzard (ATVI) stakes claim to eight gaming franchises commanding more than $1 billion in annual revenue with titles such as Overwatch, Candy Crush, and Call of Duty.
The popularity of video games will drive GPU manufacturers Nvidia (NVDA) and AMD (AMD) to new heights because gamers require high-quality GPUs to effectively game.
Nvidia CEO Jensen Huang even spouted that "the success of Fortnite and PUBG are just beyond comprehension" boosting GPU sales and capturing the imagination of global youth.
Fortnite, a "Hunger Games" style battle royal video game mirroring PUBG, has taken the world by storm in 2018.
This cultural juggernaut surpassed the 125 million gamer mark in just one year.
In February 2018, Epic Games, the maker of Fortnite, earned $126 million in one month, and it was the first time it passed PUBG in monthly sales.
In April 2018, it followed up monster February numbers by pulling in $296 million.
The growth trajectory is parabolic. Hold onto your hats.
Fortnite sparkles in the sunlight because its free-to-play model does not exclude anyone and is available on all devices.
At first, Fortnite was available for iOS customers and Samsung Android holders because it inked an exclusive deal with Samsung.
This week is the first week Epic Games is rolling out Fortnite to non-Samsung Android users with an interesting caveat.
The Android version of Fortnite bypasses Google Play (Google's app store on Android) preferring to sell the game direct for download from its official website.
This highlights that content is truly king.
Epic Games is betting the surge in popularity for its juggernaut game will sell itself.
This decision will cost Alphabet (GOOGL) $70 million per year in commission.
Apple makes it mandatory that any app downloaded to its devices must be downloaded from Apple's app store.
However, Android doesn't have the same requirements as its system is more functional, open, and a developer's dream.
Simply put, there are ways to download the game on Android without ever touching Google Play.
Going forward this could have a similar effect Spotify (SPOT) had on Wall Street on its IPO.
The middlemen or broker app could get bypassed in favor of direct sales.
Apple pockets commission on 30% of all in-app spending raking in around $60 million from Fortnite.
In-game add-on revenue is how Fortnite makes money from this free-to-play game.
The bulk of spending comes in the form of costumes better known as skins, where players pay to dress up their character in various garments selected for purchase.
The other revenue stream is a season subscription on sale for $10.
The tech sector has been migrating to subscription-based offerings and video games are no different.
This could play havoc with Alphabet's Google Play and Apple's app store down the line if prominent content producers choose to bypass their stores to sell directly.
The lack of video game exposure to the FANG group is mind-boggling. It seems they have their finger on the pulse of every other major trend in technology but have missed out on this one.
Microsoft (MSFT) is the closest FANG-like stock deep inside the video game ecosphere by way of its famous console Xbox.
In fact, Microsoft earns more than $10 billion per year from its gaming segment surpassing Nintendo at $9.7 billion per year.
This doesn't eclipse Sony's gaming revenue, which is $17 billion per year, but the 36% YOY growth in Xbox-related revenue signals its intent in the gaming industry that plays second fiddle to its cloud and software businesses.
Gaming is just a side business for Microsoft right now.
Ironically, Tencent has a 40% stake in Epic Games and is patiently waiting for government approval to sell Fortnite in China, which could be painstakingly arduous.
If Tencent gets the green light, Fortnite could develop into a monster business in 2018, and this is just the beginning.
Regrettably, Tencent has been mired in regulatory issues with the communist government reluctant to approve selling in-game products, which usually make up the bulk of revenue.
Recent blockbuster hit "Monster Hunter: World" was blocked by censors after debuting to great fanfare on August 8, 2018.
This title was expected to be one of the most popular video games of 2018.
Chinese state censors are on a short-term crusade to block the video game industry from receiving critical licenses and is the main reason for Tencent shares' headwinds.
Tencent shares peaked in January and are down almost 15% in 2018 because of uncertain gaming revenues.
Investors need to wake up and understand the gaming industry is about to mushroom because of demographics and the migration away from outdoor activity.
Following generations will have an even stronger bias toward technology-based indoor entertainment.
We are entering into the unknown of $4 billion per year video game businesses based on just one title and not one company.
Fortnite made PUBG's $700 million in revenue last year look paltry.
Gamers will soon see the rise of a $5 billion game franchise in 2019 and the sky is the limit.
This industry has growth, growth, and more growth and these single titles could surpass revenue of large semiconductor or hardware companies.
Don't underestimate the power of your child gaming away in your basement, he or she is part and parcel of a wicked tech growth driver about which not many people know.
Unfortunately, Epic Games is not a public company and shares cannot be purchased, but the success of Fortnite means that investors must pay heed to these new developments.
I am highly bullish on the video game sector and a big proponent of Activision (ATVI). A secondary name would be EA Sports (EA), which curates the Madden and FIFA franchises.
ATVI has felt the Fortnite effect in its share price selling off 11% because of investors' nervousness of Fortnite siphoning off ATVI gamers.
This short-term drop is a nice entry point into a solid video gaming company with various successful franchises that have withstood the test of time.
The 200-day moving average has provided ironclad support on the way up, and the Fortnite phenomenon won't last forever.
I would avoid the video game ETF ticker symbol GAMR because it includes one of my bona fide shorts - GameStop (GME).
It's mainly comprised of American, Japanese, and a Korean name but it would be sensible to focus on the companies with the highest quality comprehensive content.
The ETFs recent drop is also due to the strength of Fortnite.
________________________________________________________________________________________________
Quote of the Day
"Companies in every industry need to assume that a software revolution is coming." - said Silicon Valley venture capitalist Marc Andreessen.
Mad Hedge Hot Tips
August 14, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
Note to Paid Subscribers: As part of my never-ending quest to improve the Mad Hedge service, I am launching a new daily product called The Five Most Important Things That Happened Today (and what to do about them). It's all part of my under-promise, over-deliver strategy. The service is free for current paid subscribers. It is exactly what it says it is, and should boost your trading performance substantially. Enjoy!
1) Investors Continue to Pile Money into Deflation Plays. Since the 10-year U.S. Treasury bond yield (TLT) bottomed at 1.35% in June 2016, $130 billion had fled equities and $500 billion has poured into bonds, losing money. It's like driving 90 miles an hour only looking at the rearview mirror. It will all end in tears.
2) Home Depot Blows Out Q2 Earnings, but triggers a "Buy the rumor, sell the news." Same-store sales up 8%, vs. 6.6% expected, and H2 guidance is raised. Click here for details.
3) Turkey Retaliates by Banning U.S. Electronics Imports. Who cares? Most Turks own Samsung's anyway, but it does show the bitter fruit of trade wars. Click here for more.
4) Bitcoin Hits New 2018 Lows, Breaking $6,000. So, it WAS a Ponzi scheme after all, down 70% since December. For the bloody details click here.
5) Congressional Budget Office is Predicting Big Slowdown in 2019. Once the tax cuts are spent, it's all over but the crying. To see why click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WHY BANKS HAVE PERFORMED SO BADLY THIS YEAR),
(JPM), (C), (GS), (SCHW), (WFC),
(HOW FREE ENERGY WILL POWER THE COMING ROARING TWENTIES),
(SPWR), (TSLA),
(BUY ADVANCED MICRO DEVICES ON THE INTEL STUMBLE),
(AMD), (NVDA), (INTC)
Global Market Comments
August 14, 2018
Fiat Lux
Featured Trade:
(WHY BANKS HAVE PERFORMED SO BADLY THIS YEAR),
(JPM), (C), (GS), (SCHW), (WFC),
(HOW FREE ENERGY WILL POWER THE COMING ROARING TWENTIES),
(SPWR), (TSLA)
I went to the local branch of Wells Fargo Bank (WFC) yesterday, and I was appalled. The bank occupied the most expensive corner in town. It was staffed by a dozen people, all of whom spoke English as a second language.
Ask even the simplest question and they had to call a support center and wait 10 minutes on hold for the answer. It took an hour for me to open a checking account for one of my kids. The branch was in effect a glorified call center.
I thought, "This can't last." And it won't.
Banks were supposed to be the sector to own this year. They had everything going for them. The economy was booming, interest rates were rising, and regulations were falling like leaves in the fall.
Despite all these gale force fundamental tailwinds the banks have utterly failed to deliver. The gold standard J.P. Morgan is up only 8.46% on the year, while bad boy Citibank (C) is down 5.47%, and the vampire squid Goldman Sachs (GS) is off a gut-punching 10.27%. Where did the bull market go? Why have bank shares performed so miserably?
The obvious reason could be that the improved 2018 business environment was entirely discounted by the big moves we saw in 2017. Last year, banks were the shares to own with (JPM) shares up a robust 24.5%, while (C) catapulted by 29.3%.
It is possible that bank shares are acting like a very early canary in the coal mine, tweeting about an approaching recession. Loan growth has been near zero this year. That is not typical for a booming economy. It IS typical going into a recession.
When the fundamentals arrive as predicted but the stock fails to perform it can only mean one thing. The industry is undergoing a long-term structural change from which it may not recover. Yes, the bank industry may be the modern-day equivalent of the proverbial buggy whip maker just before Detroit took over the transportation business.
Managing a research service such as the Mad Hedge Technology Letter, it is easy to see how this is happening. Financial services are being disrupted on a hundred fronts, and the cumulative effect may be that it will no long exist.
This explains why this is the first bull market in history where there has been no new hiring by Wall Street. What happens when we go into a bear market? Employment will drop by half and those expensive national branch networks will disappear.
Financial services are still rife with endless fees, poor service, and uncompetitive returns. Online brokers such as Robin Hood (click here) will execute stock and option transactions for free. Now that overnight deposits actually pay a return they make their money on margin loans. They have no branch network but are still SIPC insured.
Legacy brokers such as Fidelity and Charles Schwab (SCHW) used to charge $25 a share to execute and are still charging $7.00 for full-service clients. And it's not as if their research has been so great to justify these high prices either. In a world that is getting Amazoned by the day, these high prices can't stand.
Regular online banking service also pay interest and are about to eat the big banks' lunch. Many now pay 1.75% overnight interest rates and offer free debit and credit cards, and checking accounts. Of course, none of these are household names yet, but they will be.
To win the long-term investment game you have to identify the industries of the future and run from the industries of the past. The legacy financial industry is increasingly looking like a story from the past.
Mad Hedge Technology Letter
August 14, 2018
Fiat Lux
Featured Trade:
(BUY ADVANCED MICRO DEVICES ON THE INTEL STUMBLE),
(AMD), (NVDA), (INTC)
It's not an ideal time to own chip stocks because of the trade war jading the chip sector that has inextricable revenue links to mainland China.
But if you feel audacious and want a name to sink your teeth into that is hitting all the right notes, readers must look at Advanced Micro Devices, Inc. (AMD).
After all, what follows a trade war is trade peace, and the chips are the most oversold tech sector out there.
Intel Corporation's (INTC) loss is (AMD)'s gain.
It's a zero-sum game where companies are battling for the same contracts.
Chip companies are under relentless pressure to innovate and enhance bit growth and chip capacity.
They spend billions of dollars to retain and expand their talent pool and on R&D to produce the type of high-end chips for which end product companies clamor.
Sometimes, the development process stifles, delaying chip production and delivery of the chips.
Intel botching the 10nm (nanometer) process technology is a kick in the teeth opening up the pathway for (AMD) to harvest further market share gains.
Intel is experiencing a management crisis as of late with former CEO Brian Krzanich resigning in humiliation after details of an inappropriate relationship with an employee surfaced which breached company rules.
The delay is further proof that Intel fails to execute and develop chips relative to competition, and these announcements hurt investor sentiment and the bottom line.
AMD's comparable 7nm Rome is set to hit the market six to nine months before the Intel chips.
This time frame will allow AMD to make an all-out assault on the CPU market and adoptees will be plenty.
The recent success of AMD has coincided with the heaps of innovation generated by this reinvigorated company.
Namely the Radeon GPUs and Ryzen mobile processors have knocked the cover off the ball.
The Ryzen processors are hot because of their competitive power mixed together with a relatively lower cost.
With Intel on the back burner, these prominent chip models will boost earnings growth for AMD in the short term explaining AMD's meteoric rise from a year-to-date low of $9.50 on April 3, 2018, to an intraday high of more than $20 on July 30, 2018.
Any company that doubles in four months warrants my attention.
How did this all happen?
December 1, 2005 represented the high-water mark for (AMD) when shares surged past $40 only to crumble like a stale cookie down to $2 on September 1, 2008.
The price action was nothing short of horrific, and the three years of sequential decline was an investors nightmare.
The story starts in 1993 when AMD created a 50-50 partnership with Fujitsu called FASL to manufacture flash drives.
This monumental loss-making subsidiary later changed its name to Spansion and tore into AMD's profitability losing more than $250 million in its last nine months being an arm of AMD.
AMD divested from this business with Spansion spinning itself out into its own public company.
Spansion was a disaster operating solo leading the company to file for Chapter 11 bankruptcy on March 1, 2009 and sacking 3,000 employees without severance pay.
AMD's turnaround started in 2014 when it hired Dr. Lisa Su who was once vice president of IBM's semiconductor research and development center.
She replaced Rory Read whose PC background made him highly expendable and unsuitable for the future of AMD as well as lacking the technical pedigree to make the decisions for the long-term vision of AMD.
His background as chief operating officer of Lenovo Group, Ltd. influenced him to heavily bet the ranch of the PC flash drive market, which has been in sequential decline for years.
This masterstroke is paying dividends for AMD.
Out of the gates, Lisa Su presented her vision in May 2015 when she detailed her long-term blueprint focusing on developing high-performance computing and graphics technologies for three growth areas: gaming, datacenter, and "immersive platforms" markets.
The change in direction worked out for AMD increasing top-line growth from $4 billion in 2015 to $5.33 billion in 2017.
The outperformance continues with AMD ringing in $3.41 billion for the first two quarters of 2018.
Because of Lisa Su, AMD chips found their way into Microsoft Xbox consoles among other businesses and the long-term vision is playing out positively to the benefit of shareholders.
AMD goes mano a mano with Nvidia (NVDA) in the highly lucrative GPU segment and data center.
Many analysts believed there was no way to come out of this unscathed. But as we have found out, this market is not a winner-takes-all market and there is space for other players to take a piece of the pie.
The Data Center market is poised to eclipse $70 billion by 2021.
AMD server chip projects to command 5.5% of market share in 2019, up from the 2.2% market share in 2018.
Two years later should be even healthier for AMD whose market share will rapidly grow to around 9.5%.
Crypto mining-based purchases of AMD GPU's were all the rage in 2017 with their products flying off shelves like hotcakes.
Last year saw crypto mining make up a material 10% of revenue because of Bitcoin's dazzling run up to $20,000.
High demand for Ryzen and Radeon products continues unabated and this segment will take in more than $4 billion in 2018.
This division's performance is the main reason why AMD annual revenues will increase 47% YOY in 2018 after a YOY rise of 50% in 2017.
Not only are GPU chips needed for crypto mining, the main buyers of GPU are companies developing artificial intelligence and machine learning.
The data center business is tied to the cloud industry, which is one of the hottest parts of technology in the world.
These robust secular trends and AMD's migration to these premium businesses solidifies the genius decision to allow Dr. Lisa Su to steer the ship.
Veering away from the legacy business that cratered its share price down to $2 and being part of a high-growth industry with great products will fuel the share price skyward.
The technology sector has been rife with M&A activity in 2018 with successful and failed mergers happening left and right.
AMD has been rumored for takeover numerous times. The share price received short boosts highlighting the attractiveness this name commands to outside investors.
Top-line growth is what is driving AMD in 2018, and it is in the middle of a growth sweet spot.
Nvidia has gone up 1,750% in the past five years while laying claim to 70% gross margins in its vaunted GPU division.
It will be demonstrably bullish if AMD can mildly replicate this growth trajectory, and I believe it will.
The Mad Hedge Technology Letter has advised readers to stay away from chip companies because of the complicated trade war.
If the trade war subsides or even ends, semiconductor chips will be the first group of stocks whose shares explode to the upside.
In any case, it's always great to understand the premium names in each industry, and I am bullish on AMD.
After the spike to more than $19, a pullback is warranted but it won't be long before these shares go back into overdrive.
Directly after the macro headwinds pass by will be the preferred time to enter into AMD unless you are a long-term investor and plan to buy and hold.
________________________________________________________________________________________________
Quote of the Day
"Especially in technology, we need revolutionary change, not incremental change," - said cofounder and CEO of Alphabet Larry Page.
