August 2018

Taking the E-Ticket Ride with Walt Disney

I'll never forget the first time I met Walt Disney. There he was at the entrance on opening day of the first Disneyland in Anaheim, Calif., in 1955 on Main Street shaking the hand of every visitor as they came in. My dad sold the company truck trailers and managed to score free tickets for the family.

At 100 degrees on that eventful day it was so hot that the asphalt streets melted. Most of the drinking rooms and bathrooms didn't work. And ticket counterfeiters made sure that 100,000 jammed the relatively small park. But we loved it anyway. The band leader handed me his baton and I was allowed to direct the musicians in the most ill-tempoed fashion possible.

After Disney took a vacation to my home away from home in Zermatt, Switzerland, he decided to build a roller-coaster based on bobsleds running down the Matterhorn on a 1:100 scale. In those days, each ride required its own ticket, and the Matterhorn needed an "E-ticket," the most expensive. It was the first tubular steel roller coaster ever built.

Walt Disney shares have been on anything but a roller-coaster ride for the past four years. In fact, they have absolutely gone nowhere.

The main reason has been the drain on the company presented by the sports cable channel ESPN. Once the most valuable cable franchise, the company is now suffering from on multiple fronts, including the acceleration of cord cutting, the demise of traditional cable, the move to online streaming, and the demographic abandonment of traditional sports such as football.

However, ESPN's contribution to Walt Disney earnings is now so small that it is no longer a factor.

In the meantime, a lot has gone right with Walt Disney. The parks are going gangbusters. With two teenaged girls in tow I have hit three in the past two years (Anaheim, Orlando, Paris).

The movie franchise is going from strength to strength. Pixar has Frozen 2 and Toy Story 4 in the pipeline. Look for Lucasfilm to bring out a new trilogy of Star Wars films, even though Solo: A Star Wars Story was a dud. Its online strategy is one of the best in the business. And it's just a matter of time before they hit us with another princess. How many is it now? Nine?

It is about to expand its presence in media networks with the acquisition of 21^st Century Fox (FOX) assets, already its largest source of earnings. It will join the ABC Television Group, the Disney Channel, and the aforementioned ESPN.

It has notified Netflix (NFLX) that it may no longer show Disney films, so it can offer them for sale on its own streaming service. Walt Disney is about to become one of a handful of giant media companies with a near monopoly.

What do you buy in an expensive market? Cheap stuff, especially quality laggards. Walt Disney totally fits the bill.

As for old Walt Disney himself, he died of lung cancer in 1966, just when he was in the planning stages for the Orlando Disney World. All that chain smoking finally got to him. Despite that grandfatherly appearance on the Wonderful World of Color weekly TV show, friends tell me he was a complete bastard to work for.

Walt Disney Earnings by Source in Fiscal 2017

A Very Bright Spot in Real Estate

Diary, Newsletter

I feel obliged to reveal one corner of this bubbling market that might actually make sense.

By 2050 the population of California will soar from 37 million to 50 million, and that of the U.S. from 320 million to 400 million, according to data released by the US Census Bureau and the CIA Fact Book (check out the population pyramid below).

That means enormous demand for the low end of the housing market, apartments in multi-family dwellings.

Many of our new citizens will be cash-short immigrants. They will be joined by generational demand for limited rental housing by 65 million Gen Xer's and 85 million Millennials enduring a lower standard of living than their parents and grandparents.

These people aren't going to be living in cardboard boxes under freeway overpasses.

If you have any Millennial kids of your own (I have three!), you may have noticed that they are far less acquisitive than earlier generations.

They would rather save their money for a new iPhone than a mortgage payment. Car ownership is plunging, as the "sharing" economy takes over.

This explains why the number of first time-home buyers, only 32% of the current market now, is near the lowest on record.

It's not like they could buy even if they wanted to.

Remember that this generation is almost the most indebted in history, with $1.5 trillion in student loans outstanding.

They don't care. Coming of age since the financial crisis, to them, home ownership means falling prices, default and bankruptcy. Bring on the "renter" generation!

The trend toward apartments also fits neatly with the downsizing needs of 85 million retiring Baby Boomers.

As they age, boomers are moving from an average home size of 2,500 sq. ft. down to 1,000-sq.-ft. condos and eventually 100-sq.-ft. rooms in assisted living facilities.

The cumulative shrinkage in demand for housing amounts to about 4 billion sq. ft. a year, the equivalent of a city the size of San Francisco.

In the aftermath of the economic collapse, rents are now rising dramatically, and vacancy rates are shrinking, boosting cash flows for apartment building owners.

Fannie Mae and Freddie Mac financing is still abundantly available at the lowest interest rates on record. Institutions combing the landscape for low volatility cash flows and limited risk are starting to pour money in.

Run the numbers on the multi-dwelling investment opportunities in your town. You'll find that the net after tax yields beat almost anything available in the financial markets.

August 7, 2018

Tech Letter

Mad Hedge Technology Letter
August 7, 2018
Fiat Lux

Featured Trade:
(WHAT TO DO ABOUT TECH NOW),
(AAPL), (FB), (NFLX), (AMZN), (GOOGL), (AMD), (MSFT)

What to Do About Tech Now?

Tech Letter

Is it time to dump tech?

Short term, yes - long term, no.

Recently, a series of big tech earnings misses throttled the market tearing into the positive investor sentiment, which was holding up nicely after the early year sell-offs.

Every precipitous and steep drop this year has followed with a mammoth dip buying spree lifting stocks to newer highs.

This is the type of robustness investors rejoice in when talking about the price action of technology stocks.

Not only is the dip buying awe-inspiring, but the lack of hesitation in the dip buying is even more impressive.

Investors have scant time to pick up these precious names before the entry points disappear like an invisibility cloak.

Ditch these stocks at your peril, because the buying queue represents the likes of all the tech behemoths waiting to buy back their own stock, namely Warren Buffett, and the flight to quality brigade that view big cap stocks as a de-facto cash sanctuary.

The anxiety was palpable when Netflix's (NFLX) management badly miscalculated new subscription business after a brilliant earnings report from Microsoft.

Investors got another wrench in their stomach when Facebook (FB) followed Netflix with dismal guidance ripping apart the growth narrative and pivoting toward ameliorating its controversial business model giving investors a fresh dose of uncertainty.

All eyes were planted on Alphabet (GOOGL), Amazon (AMZN), and Apple to provide some calm to the markets.

That's exactly what they did.

Part of the problem now is that expectations are so exaggerated, these companies have little wiggle room to overdeliver.

Industry specialists largely believe tech profits to rise 20.9% YOY this earnings season. The lion's share of the growth has been contained to the headliner names such as Amazon, which has grown like no company has ever grown before.

Estimates show a slide in YOY tech profits for the third-quarter earnings decelerating down to less than 15%. While still good, it's not the 20% growth YOY, and over that it has been fueling tech's rise in increasingly precarious market conditions.

The downshift in profit growth has been anticipated for the past few quarters, as investors thought a trip wire would at some point bring down the entire FANG group.

What we have found out is that not all FANGs are created equal. Some are more equal than others.

The past earnings performance indicated this with Amazon's emphatic top-line growth numbers blowing away the most adamant bear.

Netflix's narrative is still intact, and consolidation is badly needed for a stock that has gone parabolic in 2018.

The short-term capitulation of Facebook and Netflix is proof that large cap tech also has downside risk embedded in its model.

It was starting to seem like down days were never in the cards.

Lowered tech guidance for next quarter will really test the market's resiliency during next earnings season.

If these numbers miss spectacularly, expect the tech sector to give back a good chunk of the year's gains back.

Decelerating profits is never a positive sign. However, after coming from Mt. Everest profit levels, will the markets brush it off and power higher?

There is a lot more juice left in this tech story, and sharp corrections should still be bought.

Tech is becoming quite frothy at these levels and choosing the right tech story will go a long way to sleeping well at night.

It will be excruciatingly difficult for tech companies to impressively beat on the upside next quarter.

However, the secular story and unique earnings growth are treasures compared to other sectors that are getting beaten into submission.

When you delve into the numbers, the success becomes comical.

Apple is the first company to cross the $1 trillion of market cap.

This company prints money to the tune of $11 billion in profits each quarter.

It possesses a devoted userbase, surging software and services segment, and premium grade smartphones allowing Apple to cash in profits to the extent they do.

CEO Tim Cook sent an email to Apple's employees downplaying the milestone, instead saying "financial returns are simply the result of Apple's innovation."

He is completely correct.

The innovation has fed back through spiking profits and boosting sales allowing Apple to make money hand over fist.

This in turn is a big reason why Apple's share price has almost quadrupled with Cook at the helm.

The best and brightest tech companies in 2018 share one unified trait: innovation.

And it is not a surprise that Amazon and Microsoft (MSFT) will be next to join the trillion-dollar club as they boast some of the most innovative staff in the world.

As these two companies pass the trillion-dollar market cap, it will encourage the next tier of flourishing tech companies to make the jump to the trillion-dollar club.

The tech sector is still eating everybody's lunch with every business in the world migrating to their front yard.

Some weakness in the extended tech shares have been a matter of when and not if.

Advanced Micro Devices, Inc. (AMD) is a stock gaining 22.8% just in the month of July underlining the overheated price action of some of these tech names.

I am largely staying away from chip stocks now because trade tensions have bred uncertainty around Chinese chip revenues.

The tech sector has many moving parts and a trade war can hurt one part of tech while others remain unblemished.

Another front of concern is data regulation headlines rearing their ugly heads from time to time.

There are more hurdles for tech stocks going forward, but that does not mean they will get tripped up.

I am in a tech holding pattern until I find an opening to issue my next slew of tech trade alerts.

Year Over Year Profit Growth

________________________________________________________________________________________________

Quote of the Day

"I will always choose a lazy person to do a difficult job because a lazy person will find an easy way to do it." - said founder of Microsoft Corporation Bill Gates.

Trade Alert - (DIS) August 6, 2018 BUY

Trade Alert

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

August 6, 2018 - MDT Alert (BERY)

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

August 6, 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

August 6, 2018

Diary, Newsletter

Global Market Comments
August 6, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or FINDING A NEW GIG),
(FB), (TWTR), (INTC), (NFLX), (AAPL), (AMZN),
(RIGHTSIZING YOUR TRADING)

The Market Outlook for the Week Ahead, or Finding a New Gig

Diary, Newsletter, Research

I'm back! Yes, I have freshly debarked from the KLM 10-hour nonstop from Amsterdam, with little gin bottles in the shape of old Dutch houses in my pockets.

And what do I do upon landing but rush to pound out another newsletter, digesting what I learned from reading a mountain of research on the way home.

Oops! It looks like I forgot how to type!

My 24-hour layover there enabled me to view the great Rembrandt masterpieces at the Rijksmuseum and explore Anne Frank's house, now part of a large museum complex. When I visited there 50 years ago you could just walk right in the front door, as there was almost no one there.

It was not a bad summer as far as losses go; a charger left behind on the Queen Mary, a hair brush in Paris, and all of my money in Zermatt, Switzerland. That last item was the result of my daughter breaking an ankle while riding a scooter down the Matterhorn.

If you are going to break something make sure you do it in Switzerland. The X-rays, MRI scans, doctors, and cast cost me only $1,000. The same would have cost me $10,000 in the U.S. But the wheelchair set me back $650. A better one could be had at home from Amazon for $115.

Still, there is no better way to breeze through customs and immigration but in a wheelchair. We avoided the long lines and saved so much time that my other daughter promised to break her ankle next year to achieve the same shortcuts.

Arriving at home in San Francisco it immediately became clear that a lot of chart formations are busted as well, especially those for Facebook (FB), Twitter (TWTR), Intel (INTC), and Netflix (NFLX). Apple (AAPL) is bumping up against my 2018 target of $220, while Amazon nearly hit my $2,000 goal.

With tech likely resting until the NEXT round of 25% earnings growth that starts in two months, we are going to have to find a new gig to earn our crust of bread. That will most likely be small caps, value plays, and multiyear laggards. Last year's big August play was in steel, gold, industrials, and commodities, which are all now getting hammered by trade wars.

Even if I had stayed at home in July trading like a one-armed paperhanger I'm not sure I would have made any money. Tech melted up, then melted down, and as we all know from hard-earned experience, the losses always cost more than the gains.

The week went out with a July Nonfarm Payroll Report that was tepid at best at 157,000. But headline unemployment stayed at 3.9%, a 17-year low. With the fifth week of gains and the (SPY) now up 6.2% in 2018 it appears that the markets only want to hear good news...for now.

Professional and Business Services were up 51,000, Manufacturing gained 37,000, while Hospitality and Leisure picked up 40,000 jobs. The bankruptcy of Toys "R" Us seems to have cost the economy 32,000 jobs. The broader U-6 "discouraged worker" unemployment rate fell to 7.5%.

Now is the golden age of the working high school dropout, the criminal background, and the DUI conviction. Many companies would rather hire former junkies that pay up for expensive college grads, which is why wage gains are still going nowhere, and perhaps, never will. Expensive retiring baby boomers replaced by cheap minimum-wage millennials is also a drag on wages.

Deflation isn't just hitting wages. It is destroying the financial industry as well, as high-paid yuppies are replaced by robots. This is the first bull market in history with no net hiring by Wall Street.

Wells Fargo no longer actually manages money, although it will readily accept your money to do so and farm it out to bots. Fidelity launched the world's first zero fee index fund, the Fidelity ZERO Total Market Index Fund (FZROX). As interest rates are now providing new income sources for managers, expect negative fee funds to come soon.

Markets are certainly climbing a wall of worry, a Great Wall. The Chinese are matching our threatened 25% tariffs on an additional $200 billion of trade with $60 billion of their own. After that retaliation will have to take indirect forms, as they have run out of tats to match our tits (oops, doesn't really work, does it?).

They might shut down the massive General Motors (GM) plants in China, where they sell more cars than in the U.S., and a LOT more Buicks. They could also interfere with the Apple assembly line. Remember, trade wars are only easy to win when you run a dictatorship. They could also continue weakening the yuan to offset the tariffs, as they have done so far. We can't retaliate there with a rising interest rate regime.

Speaking of rates, you can bet your bottom dollar that the Fed will raise them another 25 basis points to a 2.0% to 2.25% range at their upcoming September 25-26 meeting, after having passed last week. A market killing inverted yield curve is now only months away. Rising rates don't matter until they do, and then they matter A LOT!

Also, of concern is the appreciating levels of the Mad Hedge Market Timing Index, which at a nosebleed 71 is approaching seven-month highs. Buying up here never offers a good risk/reward ratio.

As I have been climbing in the Alps 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, which is usual after the big jobs reports of the previous week..

On Monday, August 6, there will be nothing of note to report.

On Tuesday, August 7 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.

On Wednesday, August 8 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 PM Fed governor Jerome Powell holds a press conference.

Thursday, August 9, 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, August 10 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'll be recovering from jet lag and getting back into my groove. I'll send you a Trade Alert as soon as I find a good entry point. The year-end sprint is now on.

Below look at the gigantic smoke plume rising to 40,000 feet from the massive California fires that I flew past on the way home.

Good luck and good trading.

Rightsizing Your Trading

Diary, Newsletter

I can't tell you how many times I have been woken up in the middle of the night by an investor who was sleepless over a position that was going the wrong way.

Gold was down $50, the Euro was spiking two cents, or the stock market was enduring one of its periodic heart attacks.

Of course, my answer is always the same.

Cut your position in half. If your position is so large that it won't let you sleep at night on the bad days, then you have bitten off more than you can chew.

If you still can't sleep, then cut it in half again.

Which brings me to an endlessly recurring question I get when making my rounds calling readers.

What is the right size for a single position? How much money should they be pouring into my Trade Alerts?

Spoiler alert! The answer is different for everyone.

For example, I will not hesitate to pour my entire net worth into a single option position. The only thing that holds me back is the exchange contract limits.

But that's just me.

I have been trading this market for nearly half a century. I have probably done more research than you ever will (I basically do nothing but research all day, even when I'm backpacking, by audio book).

And I have been taking risks for my entire life, the financial and the other kind, quite successfully so, I might say. So, me taking a risk is not the same as you taking a risk.

Taking risks is like drinking a fine Kentucky sipping bourbon. The more frequently you drink, the more you have to imbibe to get a good buzz.

Eventually you have to quit and start the cycle all over again. Otherwise, you become an alcoholic.

So you can understand why it is best to start out small when taking on your first positions.

Imagine if the first time you went out to drink with your college dorm roommates and you finished off an entire bottle of Ripple or Thunderbird? The results would be disastrous and nauseous, as they were for me.

So, I'll take you through the drill that I always used to run beginning traders at Morgan Stanley's institutional equity trading desk.

You may be new to investing, new to trading, and find all of this money stuff scary. Or you may be wary, entrusting your hard-earned money to advice from a newsletter you found on the Internet!

What if my wife finds out I'm doing this with our money?

YIKES!

That is totally understandable, given that 99% of the newsletters out there are all fake, written by fresh-faced kids just out of college with degrees in Creative Writing, but without a scintilla of experience in the financial markets.

And I know most of the 1% who are real.

I constantly hear of new subscribers who are now on their 10th $4,000 a year subscription, and this is the first one they have actually made money with.

So, it is totally understandable that you proceed with caution.

I always tell new readers to start out paper trading. Virtually all online brokers now have these wonderful paper trading platforms where you can practice the art with pretend money.

Don't know how to use it?

They also offer endless hours of free tutorials on how to use their platform. These are great. After all, they want to get you into the market, trading, and paying commission as soon as possible.

You can put up any conceivable strategy and they will elegantly chart out the potential profit and loss. Whenever you hit the wrong button and your money all goes "poof" and disappears, you just hit the reset button and start all over again.

No harm, no foul.

After you have run up a string of two or three consecutive winners, it's now time to try the real thing.

But start with only one single options contract, or a few shares of stock or an ETF. If you completely blow up, you will only be out a few hundred dollars.

Again, it's not the end of the world.

Let's say you hit a few singles with the onesies. It's now time to ramp up. Trade 2, 3, 4, 5,10, 50, or 100 contracts. Pretty soon, you'll be one of the BSD's of the marketplace.

Then you'll notice that your broker starts following your trades since you always seem to be right. That is the story of my life.

This doesn't mean that you will enjoy trading nirvana for the rest of your life. You could hit a bad patch, get stopped out of several positions in a row and lose money. Or you could get bitten by a black swan (it hurts!).

Those of you who have been following me for 10 years have seen this happen to me several times and now know what to expect. I shrink the size, reduce the frequency, and stay small until my mojo comes back.

And my mojo always comes back.

You can shrink back to trading one contract, or quit trading altogether. Use the free time to analyze your mistakes, rethink your assumptions, and figure out where you went wrong.

Was I complacent? Was I greedy? Did hubris strike again? Having a 100% cash position can suddenly lift the fog of war and be a refreshingly clarifying experience.

We all get complacent and greedy sometimes. To err is human.

Then reenter the fray once you feel comfortable again. Start out with a soft pitch.

Over time this will become second nature. You will know automatically when to increase and decrease your size.

And you won't have to wake me in the middle of the night.

Good luck and good trading.

Walt Disney Earnings by Source in Fiscal 2017

Year Over Year Profit Growth

Look Out, They Bite!