Mad Hedge Technology Letter
October 11, 2018
Fiat Lux
Featured Trade:
(WHY SNAPCHAT SNAPPED),
(SNAP), (FB), (AMZN), (NFLX)
To the dismay of tech shares, the tech industry doesn’t operate in a bubble.
The broader landscape is experiencing a dose of volatility triggered by the ratcheting up in interest rates.
There’s not much tech can do to change the narrative.
The back and forth political saber rattling isn’t helping either.
Tech is experiencing a swift rotation out of hyper-growth names such as Amazon (AMZN) and Netflix (NFLX) with investors taking profits on these names that have gone up in a straight line this year.
This does not mean you should fling these stocks into tech heaven yet.
The hardest hit names will be the marginal tech firms in the marginal tech spaces headed by dreadful management.
This narrow criterion conveniently perfectly fits one company I have written about extensively.
Enter Snapchat.
It’s been a year to forget or remember - depending on how you look at it for CEO of Snapchat Evan Spiegel.
Snapchat was one of my first recommendations of The Mad Hedge Technology Letter when I told readers to run for the hills.
To read my story on Snapchat, please click here.
At that time, the stock was trading at a luxurious $19.
Lionizing this shoddy company would be a stretch as shares have parachuted down to the $6.60 level.
The latest word is that Snapchat is burning money fast.
The cash crunch will quickly force them to raise some capital and this is just one of the many litanies of spectacular misfortunes that have beset this Venice, California social media starlet.
Maybe management is spending too much time ripping the bong on Venice Beach because the decisions being made are of that ilk.
The first catastrophic move out of many was the botched redesign alienating the core base who were dazed and confused by the new interface and functionality.
Social media works poorly when you can’t find your friends on it.
Spiegel admitted the redesign was “rushed” and it behooves me to let readers know that the redesign was the worst redesign I have ever seen in my life as I tested it out in my office.
Snapchat quickly restored the previous interface calming their shrinking core audience.
The self-inflicted wound was deep, and earnings reflected the quicksand Snapchat quickly found itself in.
Snapchat announced that global daily active users (DAUs) shrank from 191 million to 188 million.
A company at this early stage in the growth cycle should be reeling in the users non-stop.
This is far from a mature company and if executed properly the company should have the ability to cast their net far and wide scooping up new users left and right.
Let’s remember that Instagram, the Facebook (FB) owned direct competitor, is growing their user base parabolically.
Simply put, Snapchat has had no answer to Instagram’s rapid rise to fame, and that was the center of my thesis to turn my back to this rapidly deteriorating company.
Snapchat has offered no meaningful innovation to combat the terrorizing force of Instagram.
The dearth of innovation has caused the average time spent on the platform to dip from 33 minutes to 31 minutes per session.
Instagram has stretched the lead on Snapchat. In fact, it was Instagram that cleverly borrowed Snapchat’s best features and integrated them into their platform.
Sentiment has turned rotten as the stock sold off when Spiegel announced that he wants the company to turn profitable in 2019.
Investors don’t believe this one iota.
Snapchat is expected to burn through $1.5 billion in 2019, and Spiegel’s pipedream of scratching out a profit is implausible.
Snapchat is not executing on the digital ad front.
It was a year and a half ago when consensus believed Snapchat was able to churn out revenue of $540 million this quarter, but it looks more likely that Snapchat is set for revenue of just a shade over $280 million.
The severe underperformance is due to a lack of advertisers causing the eventual price of digital ads to fetch a lower price in an auction-based model.
Stinging as it might be, the lower costs of ads is also caused by the average age group of Snapchat’s core base.
Snapchatters are usually teenagers and have low purchasing power.
Targeting an older user base would improve margins significantly.
However, the conundrum is that the core user base might jump ship like they did to Facebook and shifted over to Facebook-owned Instagram.
Snap doesn’t have a Facebook posing an acute problem that could likely backfire.
General Data Protection Regulation (GDPR) in the European Union made the issue of securing personal data a national issue.
Facebook poured fuel on the fire when they disclosed several breaches clobbering their share price.
Mark Zuckerberg’s company is still reeling from the series of mishaps.
Ironically, Facebook debuted a smart speaker with prime access to user’s home when trust is at its lowest ebb around Facebook’s data collection practices.
Investors really need to ask themselves if Facebook’s management has any common sense at all.
Any decent company would have halted this project and I expect it to be a complete disaster.
Part of Snapchat’s turnaround strategy involves releasing scripted shows as short as five minutes long.
Entering into the original content wars is a tough sell. The competition is becoming fiercer and this move hardly will differentiate itself from ad buyers who already avoid Snapchat. In fact, it smells of desperation.
Snapchat has seen a brutal brain drain with management leaving in droves.
They have voted with their feet.
Chief Strategy Officer Imran Khan was the latest to announce his upcoming departure.
Others to jettison are the VP of product, VP of sales, VP of engineering, and its general counsel.
The high turnover rate will make it more complicated to execute a drastic reversal of fortune.
The only silver lining is if Zuckerberg manages to screw up Instagram after forcing the creators out with his behind-the-scenes meddling, giving a glimmer of hope to Snapchat.
A stellar performance from the execution team along with a Facebook mess of Instagram could resuscitate the user base if users start to flee Instagram in droves.
There aren’t many alternatives unless a user is inclined to quit social media.
Snapchat badly needs to build up its user base or else digital ad buyers will stay away.
I am still bearish on this stock and it would take a small miracle to spruce up the share price again.
One of the blowout performers in recent years has been defense company Lockheed Martin (LMT), whose stock has doubled since 2014.
Even if we don’t get new wars, we still have several ongoing ones, the administration has promised substantially ramped up defense spending in coming years.
And thanks to a decade of downsizing and consolidation there are only a few serious players left in the sector.
That means a lot of money piling into a limited number of names.
However, there is one factor that is helping (LMT) that virtually no one outside the theoretical physics community knows about.
That would be ignition.
No, I don’t mean the rebuilt ignition you bought on eBay for the beat-up ’68 Cadillac El Dorado up on blocks in your front yard.
Lockheed Martin’s famed Skunk Works in the California high desert has finally come out of the closet and announced that it has made a major breakthrough in fusion research.
A small functioning reactor could be available in as little as three years.
If true, the news would be dynamite.
I have long been partial to Lockheed as a company as it employed my mother on an assembly line in Los Angeles to build B-17 bombers during WWII.
When I visited a secret Russian airbase in 1992 to view the wreckage of Gary Powers’ U-2 spy plane, the steel Lockheed serial number was unmistakable.
After I asked to take it home as a souvenir, my hosts replied with a very firm “Nyet!” and hurried me out of the facility, citing it as a “National Treasure.”
The new fusion technology would deliver ten times more power than conventional nuclear reactors at a fraction of the cost.
Fusion involves the combining of two hydrogen atoms to create one helium atom releasing immense amounts of power.
To know how much, simply refer to Albert Einstein’s famous equation, E = MC squared.
If successful, the discovery could make available unlimited amounts of carbon-free energy at near zero cost without creating any toxic waste.
The breakthrough relies on using a “magnetic bottle” to contain the several hundred million degrees of heat generated instead of four foot thick reinforced concrete containment structures.
So far, the stock market is clueless.
Economical fusion power, the type unleashed by thermonuclear hydrogen bombs, has long been the dream of physicists and long-term planners everywhere.
The focus of research has until now taken place at the National Ignition Facility next door to me at Lawrence Livermore National Labs in Livermore, California. There, progress has recently suffered several setbacks, cost overruns, and time delays.
Mention California to most people, and images of love beads, tie-dyed T-shirts, and Birkenstocks come to mind.
But it is also the home of the first atomic bomb which was originally designed amid the vineyards and cow pastures of this bucolic suburb.
Dr. Robert Oppenheimer of the UC Berkeley School of Mining used to keep the first ever purified piece of plutonium in a file cabinet in his office that, thankfully, was made out of steel.
If it were a wooden cabinet, the US might have lost WWII.
Today, the world’s first cyclotron has been turned into a modern steel sculpture in a traffic roundabout, not a mile from my home.
The thinking at the time was that if someone accidentally flipped the wrong switch, it wouldn’t blow up San Francisco, or more importantly, Berkeley.
The $5 billion Livermore project aims 192 lasers at a BB-sized piece of frozen hydrogen, using fusion to convert it to helium and unlimited amounts of clean energy.
The heat released by this process reaches 100 million degrees, hotter than the core of the sun, and will be used to fuel conventional steam electric power plants.
The raw material is seawater and a byproduct is liquid hydrogen which can be used to fuel cars, trucks, and aircraft. If this all sounds like it is out of Star Trek, you’d be right.
I worked with these guys in the early 70s back when math was used to make things and before it was used to game financial markets, and I can tell you there is not a smarter and more dedicated bunch of people on the planet.
If it works, we will get unlimited amounts of clean energy for low cost in about 20 years. Oil will only be used to make plastics and fertilizer, taking the price down to $10 for domestic production only.
The crude left in the Middle East will become worthless. Lumps of coal will only be found in museums, or in jewelry, its original use. If it doesn’t work, it will melt the adjacent Mt. Diablo and take me with it.
If Lockheed’s fusion success is scalable, it could send the share price on a ballistic move from current levels.
It could well also drag the rest of the defense sector with it.
That would include Northrop Grumman (NOC) and Boeing Aircraft (BA).
If you don’t get your newsletter tomorrow, you’ll know what happened.
Now, what is this switch for?
Hi Mom!
“Google's not a real company. It's a house of cards.” – Said Former CEO of Microsoft Steve Ballmer
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
October 10, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Last Chance to Attend the Mad Hedge Savannah Strategy Breakfast. Grill John Thomas face to face about any stock or asset class in your personal portfolio and get a good breakfast and stimulating company as well. Hear what John can’t risk putting in his daily newsletters. Click here.
2) Producer Price Index Comes in at a Hot 0.2%, gut-punching the bond market and stocks once again. Deflation is truly dead. Click here.
3) Space X Lands Its First Rocket in California, at Vandenberg Air Force Base. It was an amazing sight to see from the top of Berkeley’s Grizzly Peak some 250 miles away. Click here.
4) Trump Moves to Ban Chinese Investment in the US. You can kiss those high-end San Francisco homes goodbye. The Chinese were one third of the market. So, we won’t let them give us their money anymore? What’s next? Click here.
5) Make that a Double Latte for Bill Ackman, as he discloses a major stake in Starbucks (STBX). But should you jump on his coattails? Several of his recent calls have been complete disasters. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
SPECIAL TESLA ISSUE
(OCTOBER 14 SAVANNAH GEORGIA STRATEGY BREAKFAST),
(THE BULL CASE FOR TESLA),
(TSLA), (GM), (F)
(DON’T BUY SURVEYMONKEY ON THE DIP),
(SVMK), (GOOGL), (CRM)
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
Global Market Comments
October 10, 2018
Fiat Lux
SPECIAL TESLA ISSUE
Featured Trade:
(OCTOBER 14 SAVANNAH GEORGIA STRATEGY BREAKFAST),
(THE BULL CASE FOR TESLA),
(TSLA), (GM), (F)
Come join John Thomas at the Mad Hedge Fund Trader’s Global Strategy Breakfast which I will be conducting in Savannah, Georgia on Sunday, October 14, 2018 at 8:00 AM. A sumptuous breakfast will be followed by an extended question and answer period.
I’ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, energy, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there too. Tickets are available for $209.
Breakfast will be held at a downtown Victorian Savannah hotel nearby that will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research.
To purchase tickets for the breakfast please click here.
Mad Hedge Technology Letter
October 10, 2018
Fiat Lux
Featured Trade:
(DON’T BUY SURVEYMONKEY ON THE DIP),
(SVMK), (GOOGL), (CRM)
