August 2018

The Chip Mini Recession is On

Now is not a good time to put new money to work in the semiconductor space.

American chip companies are some of the major exporters of domestic technology in a world that has been taken over by a contentious global trade war.

The administration shows no signs of backing down digging into the trenches and not giving up an inch.

Damocles' sword is hanging over chip revenues waiting for the final verdict giving investors a great short-term reason to avoid semiconductor companies.

It’s not the time to be cute in the market, but there is still one must-buy name in the chip space that is best in show and that is Nvidia (NVDA).

"Turing is NVIDIA's most important innovation in computer graphics in more than a decade," said Nvidia CEO and founder Jensen Huang.

Huang made this announcement of the eighth-generation Turing graphics architecture at a conference in Vancouver last week.

There have been recent leaks in the press that Nvidia will roll out two new GPU products shortly, the RTX 2080 and RTX 2080 Ti adding to its already stellar lineup of gaming hardware.

The quality shines through with the real-time ray-tracing offering gamers newly enhanced lighting effects.

Nvidia’s new GeForce RTX 2080 series of graphics cards is derived from the company’s Turing architecture.

To check out a demo that shows off production-quality rendering and cinematic frame rates then click here.

Innovation has been a hallmark of Nvidia’s approach for quite some time and the high quality of products has always attracted a diverse set of customers.

Enhancing its GPU products is a boon because a myriad of gamers, professional and casual, will end up upgrading to these chips that vie to stay ahead of the fierce gaming competition.

Gaming is Nvidia’s core revenue stream comprising more than 58% of sales.

Global exports revenue projects to surge 30% higher in 2018, eclipsing $906 million and could swell to $1.65 billion by 2021.

The new Turing GPU is poised to elevate margins because of its $2,500-$10,000 price point.

The Turing architecture incorporates enhanced Tensor Cores offering six times the performance of the previous generation architecture.

The steep price will entice content creators and developers to drop a wad of cash on state-of-the-art GPUs improving their own products.

The step up in price reflects the addition of modern AI and ray-tracing acceleration into the design that previous generations lacked.

Ray tracing is the act of simulating how light bounces in the physical world smoothly transferring it to a virtual image.

The new Turing architecture will produce 25 times the performance of the previous generation.

Content creators are drooling over these new possibilities.

Profit margins will increase starting from the fourth quarter when shipping commences.

Nvidia has chimed in before describing that the GPU addressable market will rake in 50 million potential customers and will be a $250 billion industry.

Innovation is Nvidia’s bread and butter and instead of resting on its laurels, it has gone out and pushed the limits further with these new GPU technologies.

Advanced Micro Devices (AMD) will have a hard time replicating Nvidia’s success after Nvidia’s second generation of products with integrated AI acceleration is lapping up praises by industry specialists.

Nvidia has adopted the playbook that so many tech companies have found useful. It has a mix of businesses that complement its core business.

The gaming division is by far its main driver. However, the rest of the 42% of revenue is made up of a collection of mainly the data center comprising 23.8% of sales, and its automotive segment bringing up the rear with 5.2% of revenue.

The total addressable market for artificial intelligence will be in the ballpark of $50 billion by 2023 offering a huge pipeline of potential deals in its data center and autonomous driving divisions.

Nvidia rings in just 5.2% of revenue from autonomous driving segment and the mass rollout of robot-taxis will ignite this segment into a meaningful part of its portfolio.

The first hurdle is the mass adoption of Waymo vehicles because they are first in line to make this futuristic industry into modern day reality.

Either way, Nvidia is advancing its technology to be in pole position to capitalize on the shift to automotive driving by developing a driverless car supercomputer named Drive PX Pegasus aimed at helping automakers create Level 5 self-driving vehicles.

Even though this industry is still in its incubation stage, a projected 33 million autonomous vehicles will be cruising around streets by 2040 ballooning from the 51,000 cars forecasted by 2021.

Nvidia’s have struggled as of late.

The post-earnings sell-off happened even though it beat the current quarter’s projections, but the all-important guidance was light.

Guidance fell short because of bitcoin’s fall from grace cratering from $20,000 to $6,000.

Low cryptocurrency prices suck the air out of the demand for GPUs required to mine cryptocurrency.

The softness in demand was reflected in last quarter’s crypto-based revenue coming in at a paltry $18 million.

The previous quarter was a different story with crypto-based revenue boosting top-line revenue substantially with quarterly revenue registering $289 million, which was 9% of total quarterly revenue.

Huang has confided that crypto-based revenue is not the main driver for Nvidia going forward. And latching itself to an unstable digital currency with governments out to drown out the fad is not sustainable.

The guidance, even though less than expected, is still healthy representing 23% YOY growth.

The sell-off offers a prime entry point in a stock that is the best publicly traded chip company in America right now.

No doubt the enhanced GPU chips will kick-start another round of increasing revenue. The lighter-than-expected revenue guidance sets the stage for Nvidia to resoundingly beat next quarter’s earnings estimate.

Crypto-based revenue was never an assumed part of Nvidia’s revenue engine and was at best a one-off boost to the bottom line.

Nvidia is still a great company producing hardware with duopoly playmate AMD, which has seen a double in its share price in the past four months.

As Nvidia retraces from its all-time high, $225 is the next level of support that would provide a timely entry point into a company that leads its industry.

These types of companies do not grow on trees and if you choose to buy into any chip stock, Nvidia would be the favorite because of its dominant position grabbing 66% of market share in the GPU market leaving runner-up AMD with the scraps.

________________________________________________________________________________________________

Quote of the Day

"It's OK to have your eggs in one basket as long as you control what happens to that basket," – said Tesla founder and CEO Elon Musk.

MOT Follow-Up to Text Alerts (VXX) Trade August 20, 2018

MOT Trades

While the Global Trading Dispatch focuses on investment over a one week to six-month time frame, Mad Options Trader, provided by Matt Buckley, will focus primarily on the weekly US equity options expirations, with the goal of making profits at all times. Read more

Mad Hedge Hot Tips for August 20, 2018

Hot Tips

Mad Hedge Hot Tips
August 20, 2018
Fiat Lux

The Five Most Important Things That Happened Today
(and what to do about them)

1) Trade is Still the Driver, as news of a China delegation visiting the U.S. pushes stock indexes toward new all-time highs. Click here.

2) However, the Technology Correction Continues, with defensive consumer staples, REITs, and utilities leading the charge. Don’t expect this to last. Click here.

3) The Tesla Meltdown Continues, with the stock down $100 in two weeks and JP Morgan joining the lynch mob. (TSLA) now has the largest short position in the market at 26%. For more jeering click here.

4) High-End Real Estate is in Free Fall Everywhere, especially in San Francisco and New York. The Chinese and Russian flight capital that has buoyed this market for a decade is drying up. Click here.

5) The Chip Mini-Recession is On, with even front-runner NVIDIA (NVDA) down $25 in a week. Click here for what to buy on the dip.

Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:

(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
IS THE TRADE WAR ON OR OFF?),
(AAPL), (UUP), (EEM), (NFLX), (TSLA), (GOOGL), (SOYB),
(SOME SAGE ADVICE ON ASSET ALLOCATION),
(IS WALMART THE NEXT AMAZON?),
(AMZN), (WMT)

August 20, 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 20, 2018

Diary, Newsletter, Summary

Global Market Comments
August 20, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
IS THE TRADE WAR ON OR OFF?),
(AAPL), (UUP), (EEM), (NFLX), (TSLA), (GOOGL), (SOYB),
(SOME SAGE ADVICE ABOUT ASSET ALLOCATION)

The Market Outlook for the Week Ahead, or Is the Trade War on or Off?

Diary, Newsletter, Research

Is the trade war on or off? Trillions of dollars in cash flow and investment depend on the answer to the question.

Traders and investors can be forgiven for being confused. It was only a week ago that a doubling of duties on Turkish imports were threatened because of an American pastor locked up there two years ago, triggering a stock meltdown.

Then, on Wednesday night presidential economic advisor Larry Kudlow hinted that he would meet with a Chinese trade delegation, prompting a 400-point Dow melt-up. Please note that except for Apple (AAPL), technology stocks did not participate in the rally one iota.

In the meantime, Apple continued its relentless march to my $220 target for $2018, so you might think about taking some money off the table. The market capitalization now stands at a staggering $1.05 trillion, the largest in the world.

It vindicates my call that at any time the administration could suddenly declare victory in the trade war, prompting a major stock market rally, regardless of the outcome.

So what happens next. Expect the trade talks to fail, or not happen at all. Market meltdowns will be followed by melt-up, then meltdowns again. Certainly, that's what the soybean (SOYB) market believes, that new canary in the coal mine for our global trade wars. It barely moved this week.

Hey, if trading were easy it would pay the federal minimum wage rate of $7.25 an hour, so quit your complaining!

As if trade wars were the only thing to worry about these days.

There is a mass protest underway at Alphabet (GOOGL) over the company's proposal to re-enter the China market. No one wants to assist the Middle Kingdom's harsh censorship regime, and some 1,000 employees have already signed a petition to this effect.

Emerging markets (EEM) continue to get pounded by trade wars and a strong U.S. dollar (UUP), which has the effect of increasing their companies' local currency debt.

Elon Musk continues his slow motion public nervous breakdown, cutting Tesla's stock at the knees down to $305. I hope you all took my advice last week to unload the stock at $380.

Netflix (NFLX) shares are undergoing a serious pullback now that it is in between upgrade launches, and the trade wars and strong dollar eat into international subscriber growth, about 80% of the total. Don't forget to buy this dip.

With the Mad Hedge Market Timing Index stuck dead on 50, I am not inclined to reach for trades here. A reading of 50 gives you the perfect "do nothing" indicator.

As is always the case when I return from vacation my first few trades are a rude awakening. August is now showing a modest return of 0.23%. My 2018 year-to-date performance has clawed its way up to 25.03% and my nine-year return appreciated to 302.61%. The Averaged Annualized Return stands at 34.91%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 32.24%.

This coming week housing statistics will give the most important insights on the state of the economy.

On Monday, August 20, there will be nothing of note to report. It will just be another boring summer day.

On Tuesday, August 21, same thing.

On Wednesday, August 22 at 9:15 AM, we learn July Existing Home Sales. Will the rot continue? Weekly EIA Petroleum Inventory Statistics are out at 10:30 AM. The Fed Minutes from the meeting six weeks ago are out at 2:00 PM EST.

Thursday, August 23 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 12,000 last week to 212,000. Also announced are July New Home Sales. The two-day Jackson Hole Symposium of central bankers starts in the morning.

On Friday, August 24 at 8:30 AM EST, we get July Durable Goods. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, it is back to school week for me, so I will be making the rounds with the new teachers at two schools. I have to confess that at my age I have trouble distinguishing between the students and the teachers.

Finally, a sad farewell to Aretha Franklin, the Queen of soul, who provided me with a half century of listening pleasure. When I was young, I couldn't afford to go see her, and when I got old I didn't have the time. Isn't life lived backward?

Good luck and good trading.

UP, DOWN, UP, DOWN!

August 20, 2018

Tech Letter

Mad Hedge Technology Letter
August 20, 2018
Fiat Lux

Featured Trade:
(IS WALMART THE NEXT AMAZON?),
(AMZN), (WMT)

Some Sage Advice About Asset Allocation

Diary, Newsletter

Asset allocation is the one question that I get every day, which I absolutely cannot answer.

The reason is simple: No two investors are alike.

The answer varies whether you are young or old, have $1,000 in the bank or $1 billion, are a sophisticated investor or an average Joe, in the top or the bottom tax bracket, and so on.

This is something you should ask your financial advisor, if you haven't fired him already, which you probably should.

Having said all that, there is one old hard and fast rule, which you should probably dump.

It used to be prudent to own your age in bonds. So, if you were 70, you should have had 70% of your assets in fixed income instruments and 30% in equities.

Given the extreme over-valuation of all bonds today, and that we are probably already in a 30-year bear market, I would completely ignore this rule and own no bonds whatsoever.

This is especially true of government bonds, which are yielding near zero interest rates in Europe and Japan, and only 2.23% in the U.S.

Instead you should substitute high dividend paying stocks for bonds. You can get 4% a year or more in yields these days, and get a great inflation hedge, to boot.

You will also own what everyone else in the world is trying to buy right now, high-yield U.S. stocks.

You will get this higher return at the expense of higher volatility. So just turn the TV off on the down days so you won't get panicked out at the bottom.

That is, until we hit the next recession. Then all bets are off. That may be three years off, or more.

I hope this helps.

John Thomas
The Diary of a Mad Hedge Fund Trader

Under or Over 70?

Is Walmart the Next Amazon?

Tech Letter

Warren Buffett is right, retail is a tough game in the face of the Amazon (AMZN) threat.

I wouldn't want to face off with them either.

Technology has been the biggest catalyst fueling a tectonic shift in the retail climate with large cap technology players usurping market share decimating competition.

The rise of e-commerce platforms has been nothing short of spectacular.

Management has also used technology to modernize the global supply chain, in-house operations, and ramp up the hyper-targeting of prime customers.

The treasure trove of big data collected has been the key to pinpointing the weaknesses and finding solutions.

Amazon knew all of this before everybody else. And, Jeff Bezos has already annihilated a large swath of the retail community that will never return.

Walmart was one of the first retailers to wipe out the small brick-and-mortar shops, and Amazon is attempting to do what Walmart did to others in the past.

Luckily, the sleeping giant of Walmart (WMT) has awoken and is laying the groundwork to launch a full-frontal assault on Amazon.

Better late than never.

More than 90% of Walmart's customers live within a 15-minute drive of one of their stores, but why drive 15 minutes with exorbitant gas prices when Amazon says you don't have to?

Once a laggard, Walmart is now instilling its newfound e-commerce operation with a new sense of zeal and purpose, offering Amazon a real threat and copying its best ideas such as two-day free shipping.

Someone must stand up to Amazon. And Walmart with its massive embedded base of loyal and fervent customers and revenue is the ideal challenger.

Currently, Amazon has extracted more than 49% of the U.S. e-commerce market in 2018.

Walmart trails Amazon by a wide margin, and the investment into developing its e-commerce business will boost the 3.7% e-commerce market share.

If Walmart maintains the drive to enhance tech operations, its e-commerce division could double its market share to more than 7.5% from its low base.

This is entirely manageable as it would only need to convert a small percentage of current non-digital customers into using its digital portals whose quality has remarkedly improved the past few years.

Redesigning the official website was timely as the new interface is sleeker, more functional than past versions, and just plain better.

There is even a tinge of Amazon in the design borrowing the best parts of its foe's design and integrating it into a modern look.

The statement of intent is there, and Amazon won't have a frictionless pathway to profits anymore.

Walmart CEO Doug McMillon has been the main man to ramp up the tech side of the business and has injected a fresh batch of youth into the management style.

Online purchases only comprise less than 20% of sales and that runway is still long and wide for a company that has only barely scratched the surface of its tech strategy.

Most tech companies are in the first innings of a long game, but Walmart is even further behind meaning there is ample room to grow.

Even McMillon believes that Walmart will morph into a certain "kind of technology company" going forward.

Not only is it beefing up its digital commerce strategy, but physical stores are getting makeovers to extract additional marginal revenue from each customer.

Walk into your nearest Walmart and you might notice it looks completely different than your father's Walmart.

It is also dabbling a bit with augmented reality to boost the in-store customer experience.

Walmart has installed an avalanche of self-checkout kiosks at the front of the store to ease and quicken customer payment.

The use of big data analytics is now aiding decisions on how to best create the optimal shopping environment for its customers.

In-store pickup automated machines called towers help customers in picking up their goods if they choose to drive to the physical store, thereby enhancing the customer service quality.

Walmart is no longer playing defense and sticking to what it knows.

It is on the front foot and should be.

Walmart announced e-commerce sales spiked 40% YOY in Q, and the man responsible for this execution is Marc Lore.

Who is Marc Lore?

Marc Lore is the chief executive officer of Walmart eCommerce U.S., and the showdown against Amazon is a personal gripe for him.

Lore joined Walmart when his e-commerce company Jet.com was snapped up for $3.3 billion in 2016.

This was more of a talent and expertise grab that Walmart needed at the time to learn the ropes of the e-commerce business to better understand how to respond to Amazon.

Before Jet.com and Walmart, Lore was on the books at Bezos' Amazon.com where his feud began.

Lore joined Amazon by way of his e-commerce company Quidsi, which he cofounded and which was bought by Amazon for $545 million in 2011.

Following Amazon's purchase, Lore and Bezos did not always see eye to eye on how Quidsi would operate inside the confines of Amazon, creating long-lasting tension that has turning into bad blood.

Quidsi specialized in certain genres such as baby products and household goods. After Amazon sucked all the knowledge and life out of Quidsi, it fired the remaining 260 employees at its New Jersey headquarters and closed down the firm.

Bezos cited "unprofitability" for shuttering Quidsi, and the thinly veiled parting shot at Lore registered deeply inside the back of his mind.

Lore reinvented himself and launched a new e-commerce business called Jet.com.

After being absorbed by Walmart, Lore was repositioned to the top of Walmart's e-commerce division leading the helm.

Lore understands how to take on Amazon after working inside its Seattle headquarters for years after the Quidsi integration and knows how to beat the company at its own game.

He is the perfect person to help Walmart infuse success into its e-commerce division. Walmart is the optimal platform for Lore to get revenge against Jeff Bezos.

A win-win proposition.

Walmart e-commerce business is on track to rise 40% in 2018.

A few changes he set off right away were the expansion of Walmart's online selection adding more than 1,100 brands, setting up a creative discount program attracting more shoppers into physical stores, cooperating with Google to integrate voice-activated shopping mechanisms, and signing up a new in-house brand called Bonobos to design an exclusive portfolio of brands mirroring Amazon's 76 private labels on its platform.

Lore even took a page out of Amazon's playbook and made two-day free shipping possible for millions of products through its website.

Warren Buffett has said in the past that not investing in Amazon and not investing more in Walmart when he had the chance were two of his most regrettable mistakes.

It could be true that this time around Buffett jumped the gun in unloading his Walmart shares. I agree that retail can be scary, but not all retail is created equal.

For some particular retailers such as Walmart, the future doesn't look so bad.

I agree with Buffett that Walmart has more than tough competitors, but if Walmart emphasizes its digital first strategy via mobile and desktop, there is a lot of wiggle room to harvest gains from these positive changes.

Walmart has been used to growing 1% to 2% in U.S. same-store sales per year, and it was habitually assumed as a constant.

The growth of 4.5% proves that tech investments are paying dividends and even though margins are pressured, it's a must to stay competitive.

If Walmart can lure in growth investors who believe in the evolving tech narrative, it would expand the variety of investors interested in Walmart.

Walmart has a lot going for them and sometimes that gets lost around all the hoopla about the Amazon threat.

Walmart has the mind-boggling scale retailers dream of and migrating its own customers online is the key to unlocking new value.

Certainly, these customers will purchase more products after algorithms identify the products customers desire to buy.

Margins will suffer somewhat from this new strategy, but growing pains and reinvestment are sorely needed to turn around the ship.

Luckily, this legacy retailer is on the right path and has hit on the right strategy.

Once the technology is running efficiently, the average revenue per user will start to rise as with for all top-tier technology companies because of leveraged scale making it possible to boost profits.

In addition, there is potential digital ad business to nurture along if Walmart can shift a decent number of legacy customers to mobile or desktop platforms.

The future doesn't look so bleak for Walmart, neither does its share price.