September 2018

Warren Buffett’s Great Tech Find in India

Warren Buffett preaches searching among your “circle of competence” to find those gems of companies that will offer abundant value in the far future.

His time horizon has always been long – 10, 20, 30 years where a company has sufficient time to execute its business strategy.

The celebrated investor’s track record is unrivaled.

Another critical rule to his playbook of uncanny success is to invest in companies within your area of expertise to avoid erroneous investment decisions.

If an investor is uncertain if a company is within its “circle of competence,” then it is likely outside the circle and best to skip investing in the company for now.

The Oracle of Omaha has taken his investment playbook to the chicken tikka masala-loving country of India, dropping a few Benjamín’s on One97 Communications Ltd., the parent company of Paytm, an Indian fin-tech firm.

This disrupting digital payments company based in Noida, India, is the nation’s largest mobile-payments firm and quite an achievement in a country that loves paper cash.

It boasts a popular smartphone app used in daily lives, and mirrors digital payment businesses of the likes of China’s Alipay or Tencent’s WeChat payment platform.

When the Indian government laid down the heavy hand of fiscal regulation on the paper currency market with an eye toward the digital currency market, an outsized winner was Paytm.

The cost of printing paper money in India per year is more than $90 million by itself.

I am not saying that the Indian government is going into overdrive adopting bitcoin tomorrow, but its pivot toward fin-tech mobile payments and Buffett’s vote of approval show where all the deep lying tech value is marinating in the world.

It is not Silicon Valley that gets more expensive by the day.

Silicon Valley is largely saturated with venture capitalist firms cherry-picking the best firms before they go public and making many times their investment once they hit the New York public markets.

Well, we are still in the early stages of India’s rapidly developing tech scene. And 2018 has seen some blockbuster cash injections such as Walmart’s investment in e-commerce juggernaut Flipkart.

Buffett has championed investing into companies with a “margin of safety,” allowing him to buy stakes at levels he believes that are well below market value.

This allows him to sleep at night because even if the company tanks short-term, he knows that eventually it will pull it together.

India can now lay claim to more than 390 Internet users, and 300 million of those use Paytm.

When 77% of a country’s population is using an app, you know there is some staying power, as the first mover advantage in the tech world has a powerful and long-term network effect such as the AWS’s foray into the cloud business.

Paytm does have a crowded lineup of heavyweights breathing capital into its company in the form of investments from Masayoshi Son’s SoftBank Vision Fund and Jack Ma’s Alibaba (BABA).

China’s presence in the Indian tech scene is strong, but it has not doubled down there as it has in Southeast Asia, where it enjoys a healthier political connection that is largely void of border skirmishes.

India is the largest democracy in Asia and a strong ally of the United States. Although American tech companies won’t be welcomed with a pristine red carpet, they do have ample opportunity to invest in the burgeoning Indian tech scene.

Buffett’s stake amounts to a 3% to 4% stake in Paytm, and the valuation has spiked to more than $10 billion.

This comes on the heels of Buffett’s adding to his position in Apple (AAPL) that sees him now own 5%.

Apple’s services division is its new cash cow and is on track to eclipse $50 billion in annual revenue next year.

Apple’s services division surpassed $30 billion in the first three quarters of 2018. Its evolution comes at a timely period where smartphone growth has peaked while invaded by low-quality Chinese substitutes.

After sliding to annual low’s in April 2018 of $160, Apple has literally gone ballistic, powering past the $1 trillion valuation mark and is trading at all-time highs around $230.

Apple is another example of why this bull market is predominantly propped up by tech companies that continue to grow earnings at an insane pace.

Only a few companies have fallen into booby traps set forth by the regulatory hurdles first set by the Europeans and General Data Protection Regulation (GDPR).

Apple is losing its smartphone battle in India, but Indians can’t afford iPhones yet and even Netflix (NFLX) is seen as an expensive streaming service.

The average Indian does not possess the purchasing power that North America and Europe have.

Apple has only extracted 1% of smartphone sales in India compared to leader Xiaomi, which leads the market with a 28% share. Further down-market Chinese phone maker Oppo lags with 10% and Vivo with 12%.

It doesn’t matter for Apple.

Apple continues to milk the North American and European markets to great effect padding profits with its high-quality services business.

China was the undeveloped market that launched Apple’s profits sky high. And American tech companies are ostensibly using this same strategy in India and hoping to cement the best strategy for revenue down the road.

Buffett’s investment is finally a green light for India if there ever was one, and every Silicon venture capitalist has to be licking their chops to squeeze value out of India.

The value is deep lying, but it will pay dividends within five to 10 years as India’s economy rises with its citizen’s discretionary income.

With every Tom, Dick, and Harry lusting after the India market, it will drive valuations firmly higher for the foreseeable future.

The fear of missing out (FOMO) will expedite the pivot toward India where many of the most conservative investors could ironically end up.

The tech relationship between America and India is demonstrably synergistic with Indian born CEOs heading Google (GOOGL) and Microsoft (MSFT) among other influential tech companies.

Berkshire’s (BRK/B) funds join the Chinese, Japanese, and Silicon Valley venture capitalist’s capital queuing at India’s front door awaiting to unlock value.

Buffett even opted out of investing in ride-sharing behemoth Uber, because apparently the “margin of safety” was not sufficient enough in the proposal.

Buffett was even quoted on a local Indian television station gushing about the country saying, “If you’ll tell me a wonderful company in India that might be available for sale, I’ll be there tomorrow.” That day has surfaced in the form of his investment in Paytm.

Apparently, Buffett’s expertise lies in India now and Indian-born Ajit Jain is one of four Berkshire executives running the company on a day-to-day basis.

This will pave the way for more tech investments in the swiftly evolving Indian tech scene, and Berkshire will ring in the profits of these Indian assets down the road.

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Quote of the Day

“Our favorite holding period is forever,” – said legendary American investor Warren Buffett.

Trade Alert - (SPY) September 4, 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

Mad Hedge Hot Tips for September 4, 2018

Hot Tips

Mad Hedge Hot Tips
September 4, 2018
Fiat Lux

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

1) Trade Talks Fail on Every Front, and markets hate it. Punitive tariffs against our allies are turning from a negotiating tactic to trench warfare. Expect a long slog. It’s a good day to be long volatility (VXX), now up 25% from our cost. Click here.

2) It’s Also a Good Day to be Short Bonds (TLT), as massive corporate issuance collides with huge government borrowing. A 15% profit on our short position is now within reach. Click here.

3) U.S. Manufacturing Activity Hits a 14-Year High. Yes, the economy is still red hot, but is it peaking? Click here.

4) Mercedes Launches its First Electric Car, the EQ, in the first real challenge to Tesla (TSLA) in a decade. But it still can’t match Tesla on range. Click here.

5) Ford (F) Accelerates its Exit from the Sedan Business, as we move to an SUV world. Click here.

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

(WEDNESDAY, OCTOBER 17, 2018, HOUSTON
GLOBAL STRATEGY LUNCHEON),
(DON’T MISS THE SEPTEMBER 5 GLOBAL STRATEGY WEBINAR),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
THE WAR WITH CANADA STARTS ON TUESDAY),
(MSFT), (VXX), (TLT), (AAPL), (KO), (GM), (F),
READY PLAYER ONE'S INSIGHT INTO THE FUTURE OF TECHNOLOGY

September 4, 2018

Diary, Newsletter, Summary

Global Market Comments
September 4, 2018
Fiat Lux

Featured Trade:
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON GLOBAL STRATEGY LUNCHEON),
(DON’T MISS THE SEPTEMBER 5 GLOBAL STRATEGY WEBINAR),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
THE WAR WITH CANADA STARTS ON TUESDAY),
(MSFT), (VXX), (TLT), (AAPL), (KO), (GM), (F)

The Market Outlook for the Week Ahead, or The War with Canada Starts on Tuesday

Diary, Newsletter, Research

I have spent all weekend sitting by the phone, waiting for the call from Washington D.C. to re-activate my status as a Marine combat pilot.

Failure of the administration to reach a new NAFTA trade agreement by the Friday deadline makes such a conflict with Canada inevitable.

And while you may laugh at the prospect of an invasion from the North, the last time this happened Washington burned. You can still see the black scorch marks inside the White House today.

This is all a replay for me, when in 1991, I enjoyed an all-expenses paid vacation courtesy of Uncle Sam. That’s when I spent a year shuttling American fighter pilots from RAF Lakenheath to forward bases at Ramstein, Aviano, Cyprus, and Dharan, Saudi Arabia.

It may seem unlikely that our nation’s military would require the services of a decrepit 66-year-old. However, in my last conflict I ran into another draftee who was then 66. It seems that the Air Force then had a lot of F-111 fighter bombers left over from Vietnam that no one knew how to fly.

That’s the great thing about the military. It never throws anything away. Not even me. The life of our remaining B-52 Stratofortress bombers at their final retirement in 2050 will be 100 years.

Perhaps Canada will decide that discretion is the better part of valor, and simply wait for the World Trade Organization to declare the Trump tariffs illegal, which they obviously all are.

That would then force the administration to withdraw from the organization the U.S. created at the end of WWII to regulate fair trade and go rogue. But then what else is new?

And while there was immense media time devoted to the NAFTA talks, which only oversees trade with partners with around $2 trillion each, China, the 800-pound gorilla, is still lurking out there. It has a $12.2 trillion GDP and Trump is imposing tariffs on another $200 billion of their imports there today.

The corner that Trump has painted himself into is that he has made himself SO unpopular abroad, insulting virtually everyone but Russia, that no leader is willing to risk doing a deal with him lest they get kicked out of office.

I certainly felt this in Europe this summer where the discussion was all about Trump all of the time. When you insult a nation’s leader you insult everyone in that country. I haven’t received that kind of treatment since the Vietnam War was running hot and heavy in 1968.

I’ll tell you, I’d much rather be flying combat missions over enemy territory without a parachute than trading a market like we had last week. For months now, it has been utterly devoid of low risk/high return entry points for all asset classes.

It’s been a slow-motion melt-up virtually every day against the most horrific news backdrop imaginable. Such is the wonder of massive global excess liquidity. It Trumps everything.

NASDAQ topped 8,000, proving that if you aren’t loaded to the gills with technology stocks, as I have been pleading all year, you are out of your freaking mind. If you don’t own Apple, you are doubly screwed.

I doubt that such data is available, but I bet the illiterate and the uneducated have been beating more literate types in performance by a huge margin.

The unresponsiveness to news isn’t the only thing afflicting this market. As the summer coughs and sputters its way to a close, we enter September, notorious as the most horrific trading month of the year. And we are launching into it with the Mad Hedge Market Timing Index stuck in the 70s, overbought territory, for weeks now.

Blockbuster earnings, the principal impetus for rising share prices in 2018, are now firmly in the rearview mirror, and won’t make a reappearance for another month. Then they die completely in 2019.

Perhaps this is why my long volatility position in the (VXX) is doing moderately well, even though the indexes have been hitting new all-time highs, with the S&P 500 briefing kissing $292. I rather practice my golf swing rather than try to outtrade this market, even though I don’t play golf.

Other than NAFTA, there was little to trade off of last week. Apple (AAPL) shares continue to break new records, hitting an incredible $228, in front of their big iPhone launch this month. Trump announced he was freezing wages on 1 million-plus federal employees next year. That will solve their tax problems for sure.

Coca-Cola (KO) bought British owned Costa for $5 billion, where I regularly breakfast while traveling abroad, in the hopes that perhaps its 501st new drink launch this year will be successful.

Amazon (AMZN) is within sofa change of becoming the next $1 trillion market cap company, making the parents of founder Jeff Bezos the most successful angel investors in history, worth $30 billion.

U.S. auto sales are in free fall. Car company shares (GM), (F) continued their slide as they are pummeled on every side by administration economic policies. One has to ask the question of how long the American economy can survive after losing a major leg like this one. Home sales, another vital component, are also suddenly awful.

Trump attacked big tech. The market yawned.

With the Mad Hedge Market Timing Index at 71 and bounces around in the 70s all week, I am not inclined to reach for trades here. All three of my current positions are making money, my longs in Microsoft (MSFT) and volatility (VXX) and my short in the U.S. Treasury bond market (TLT).

August finally brought in a performance burst in the final days, leaving us with a respectable return of 2.13%. My 2018 year-to-date performance has clawed its way back up to 25.30% and my nine-year return appreciated to 303.48%. The Averaged Annualized Return stands at 34.35%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 28.59%.

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

On Monday, September 3, there was a national holiday, Labor Day.

On Tuesday, September 4, at 9:45 AM the PMI Manufacturers Index is out. August Construction Spending is out at 10:00 AM.

On Wednesday, September 5 at 7:00 AM, we learn MBA Mortgage Applications for the previous week.

Thursday, September 6 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 3,000 last week to 213,000. Also announced at 9:45 AM are the August PMI Services Index.

On Friday, September 7 the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, the high point of my weekend was the funeral services for Senator John McCain. Boy, the Squids really know how to put on a ceremony. I suspect it may market a turning point for our broken American politics.

In the meantime, King Canute sits in his throne at the seashore ordering the tide not to rise.

Good luck and good trading.

September 4, 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

September 4, 2018

Tech Letter

Mad Hedge Technology Letter
September 4, 2018
Fiat Lux

Featured Trade:
(READY PLAYER ONE’S INSIGHT INTO THE FUTURE OF TECHNOLOGY),
(MSFT), (SQ), (TTWO), (AMD), (NVDA), (EA), (ATVI), (PYPL), (GOOGL), (FB)

Ready Player One’s Insight into the Future of Technology

Tech Letter

The technology-laced film Ready Player One gives viewers a snapshot into the future where technology, income inequality, and society have run their course, and the year 2045 looks vastly different from the world of 2018.

Set in a semi-dystopian backdrop, the movie offers us a deeper insight into how certain technology trends will permeate into everyday life.

The first and most obvious future trend is the copious use of avatars.

Avatars will become the new normal. The first place that humans will find them is through the use of social media and entertainment, as children eventually becoming a part of us like our social media profiles today.

The Mad Hedge Technology Letter has incessantly hammered home about the phenomenon of gaming, and this will incorporate virtual reality allowing gamers access to a new digital world.

This was the on show in the film where the likes of protagonist Wade Watts, played by Tye Sheridan spent most of his life playing in the virtual world of Oasis using his character Parzival.

This could be your child in the future.

Wade Watts character is the new cool for Generation Z, as they are largely unconcerned about underage drinking and partying like the generations before them.

Gaming and hanging out on their preferred social media platforms are the new cool.

The companies dictating the current video game industry will have the first crack at it to realize profits and develop new businesses such as Microsoft (MSFT), Nvidia (NVDA), Advanced Micro Devices (AMD), Electronic Arts Inc. (EA), Take-Two Interactive Software, Inc. (TTWO), and Activision Blizzard, Inc. (ATVI).

Children just aren’t going outside like they used to and per most studies, they are addicted to the smartphone you bought them at age 10.

Most studies have found that once a child becomes hooked on technology, it is hard to reverse the habit, as once they enter into adult life and start their career, they become even more reliant on the technologies that got them to that point in the first place.

If your kid is already staring at tech devices three to four hours per day now for activities other than school work, expect that to grow to a minimum of six to seven hours per day once he hits puberty and smartphone time limits begin to fade away.

This all means that VR and gaming could be the handsome winner in all this, and the use of social media platforms will reap the benefits as well.

Generation Z just surpassed Millennials in terms of population comprising 25% of the American populace.

Neither of these generations have grown up with VR in their daily lives because the technology wasn’t advanced enough to really make a dent in their lives.

More than 75% of Generation Z has access to a smartphone, and they can truly be called the first generation of digital natives.

Avatars will push deeper into everyday life because the facial tracking technology has advanced by leaps and bounds.

Instead of cartoon-like avatars, lifelike avatars have replaced the less refined versions. It will be a tough time going forward distinguishing what is real and what is fake.

If you think fake news is a problem now, imagine how fake it will become in the future.

This could devastate the news industry as news organizations run the risk of melting down at any point, or just being completely taken over by tech companies and their algorithms, which is already happening now with Alphabet (GOOGL).

The future looks bleak for all newspaper assets, and the ones with the most advanced digital strategies will survive.

Newspapers only have so much time they can hang on with digital ad revenue, the reason they are still in business.

Viewers don’t want to see ads – period. And at some point, they will be disrupted as well.

Swashbuckling youth already have downloaded ad-blockers to completely remove ads from their lives, and refuse to open any website that forces them to white list a website.

There are children in Generation Z who might never have seen an ad before because their digital native capability allows them to navigate around ads with adept skill.

Or the easy solution for many Millennials is just watch Netflix because the platform is ad-less. The aversion to ads is so strong that traditional media giants such as Fox are experimenting with six-second ads because that is all a viewer can tolerate these days.

The traditional media giants were forced to adopt this new format after Alphabet’s YouTube rolled out micro-ads.

Popular browser Mozilla announced it will block all tracking scripts by default beginning in 2019, thwarting unregulated data collection and relentless ad pop-ups.

The reason why digital ads will have an existential crisis is because companies will be able to monetize the pure data, forcing companies with huge digital ad businesses such as Facebook (FB) to battle with the new competition that only wants your data and not hawk ads.

This is already happening in the e-brokerage space with disruptors such as Robinhood, which charges no commission and is more interested in collecting data and getting by with interest payment revenue.

Let’s face it, digital ads are not a high-quality business even though they are a high-margin business. As tech moves forward, the quality of tech will rise eliminating all low-grade tech that is still profiting in 2018.

On the business side of things, automation is replacing humans faster than humans realize, and the replacement will be an avatar representing the face of a company.

For lower-end services, an avatar chosen by the customer will populate to often give better service than a human can provide.

If this type of service is scaled, it would offer a massive cut in costs for American corporations saving on employee costs.

It will have the same effect that self-checkout kiosks have at supermarkets, wiping out another position at the low-end.

The front-end avatar that will service you is all possible because of the rapid advancement of artificial intelligence.

Every possible situation will be programmed in the software and executed briskly.

If customers desire the human touch, they will have to pay up.

Human interaction will command a premium price because human interaction cannot be automated.

The financial industry has a huge target on its back, and swaths of financial advisors could be sacked in favor of avatars with the functional software behind it to produce profits.

In fact, many financial advisors are instructed to refrain from recommendations now and urged to collect input to enter into a proprietary algorithm that will decide the customers’ portfolio.

Big banks have enjoyed their time in the sun, but technology will disrupt them in the near future. This is why you have seen huge run-ups in innovative fintech companies such as Square (SQ) and PayPal (PYPL).

Many forms of outside entertainment are on the chopping block, as well as indoor entertainment such as Hollywood.

Hollywood A-list actors command hefty premiums to contract their services, and that could all crumble if younger audiences prefer avatar-based films with the human roles performed by unknowns.

Johnny Depp earns more than $50 million for one movie, and these insane amounts could deflate rapidly if human participation in films becomes marginalized.

Ready Player One was a test case for how much technology could be infused into a movie, and the audience easily absorbed it.

I could argue that audiences could argue even more in this VR format.

The movie had a budget of $175 million, and returned $582 million at the box office.

The resounding success will encourage more directors to inject technology into their movies, and they will have to, if they hope to tempt younger audiences to the movie theater.

Going to the movie theater is another activity that has struggled to cope against the rise of Netflix and technology.

Theaters have been forced to improve the overall experience of watching a film with prime seating, comfortable seats, and other extras that never existed.

Every industry is going through the same headache of competing with technological disruption.

Stagnation is akin to surrendering in 2018.

And it wasn’t just a fringe director creating Ready Player One, it was visionary director Steven Spielberg, one of the most famous movie directors to ever exist.

This will pave the way for other lesser-known movie directors relying on technology to pump out the profits.

They wouldn’t be the first people or the first industry to go down this road either.

The Avatars Used In Ready Player One

________________________________________________________________________________________________

Quote of the Day

“The worst thing a kid can say about homework is that it is too hard. The worst thing a kid can say about a game is it's too easy,” – said American media scholar Henry Jenkins III.