“On all open platforms, regardless of whether it's Facebook or the Apple App Store, the largest segment is entertainment and games. It's the largest revenue segment. And it's the same for Tencent.”- Said the CEO of Tencent Pony Ma
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
Mad Hedge Technology Letter
December 11, 2018
Fiat Lux
Featured Trade:
(THE REAL STORY ABOUT APPLE)
(AAPL), (QCOM), (HUAWEI), (TENCENT)
If you can’t handle the heat, then get out of the kitchen.
Well, the kitchen is getting a little bit toasty right now.
Apple (AAPL) was handed down a demonstrably negative verdict when a regional Chinese court ruled that they infringed on two patents belonging to Qualcomm (QCOM).
The Qualcomm chips were connected to photo editing and another to swiping on a touch-screen device.
This means that Apple won’t be able to sell legacy iPhone models in China which is a damaging blow to revenue prospects because older iPhone models in China offer attractive price points to wallet-light Chinese.
And when you add this all up, the ban includes over half of the iPhones on sale in China.
In general, less affordable, sleeker, fresher iterations price out many Chinese who want a piece of the Apple dream.
Even though this was a nice victory for Qualcomm, it spells trouble for the broader tech sector.
Apple’s myriad of chip suppliers who have grappled with a torrent stream of woeful news this year relating to Apple’s supply of iPhones and supply forecast of iPhones are first on the chopping block.
It’s also an excruciating blow to American business in China and this could potentially rule out any American management taking future business trips to China.
Apple looks set to join its chip company compadres on the sidelines as a stock to avoid like the plague at the moment.
Apple is a great company and a perfect hold to eternity stock, but this is not the time to jump in and out of it.
Let me explain why.
The trade war centered on future technological hegemony is directly connected to the domination of current technology in artificial intelligence, chip development, and 5G.
China has been furiously catching up to American tech the last two decades through its vast program of foreign technological forced transfers and outright intellectual property theft.
I remember testing my first shoddy Chinese smartphone from the Chinese company Coolpad to gauge a sample of the burgeoning Chinese consumer device market on a blistering hot day in Beijing in the summer of 2010.
It was one of the first iterations of Chinese smartphones on the local market and the 3G smartphone was simply terrible.
The hardware was iffy, software was untenable, design was hodgepodge and it ceased working after 3 painstaking months of testing.
I breathed a sigh of relief because I knew it would be years before Chinese tech could ever produce something material.
Since then, China and the love given to its tech sector through the state protecting its homegrown companies have come a long way since those teething years filled with shabby products and inferior expertise of yesteryear.
Chinese cell phones are now comparable to iPhones for a fraction of the cost especially the new Huawei and Xiaomi models and the companies want recognition for their success.
I have interviewed scores of Huawei engineers who describe a life of grinding out a modest existence in mega-cities dotted around China.
They lament the 12-hour back-breaking work days, suffocating authoritarian management style, and the 3am on-call staff meetings, but they rejoice in the accomplishment of collecting that down payment for a standard Chinese apartment in a subpar constructed building.
They earn 30% of what Apple engineers make per year just to seize an average life in a second-tier Chinese city.
They don’t complain and accept it as a consequence of cut-throat competition in a country of 1.3 billion trying to hustle the best they can.
These unbearable timelines and the crunch to develop the national brand of Huawei and its other protected tech behemoths is how China rose up from the ashes of irrelevancy to become arguably competitive with the American tech machine that is Silicon Valley.
Even through all of the local hyper-growth, there was one unwritten rule that allowed one squeaky clean American company from Cupertino to evade all of the fractious competition and make an absolute killing in China.
Apple was protected in China before until now that is.
I find it dubious that the timing of the court verdict was the first business day after the arrest of CFO of Huawei Meng Wanzhou.
By connecting the dots, this appears as if it was an indirect ruling from the higher-ups signaling that Apple won’t be handed a free pass anymore and a warning shot fired to Washington.
Even worse, the Chinese regulatory environment is opaque at best-giving discretion to Chinese authorities to do as they see fit.
The opaque nature of Chinese regulation can draw out cases for years potentially drowning out the sales of iPhones and banishing Apple and its products in China to the history books.
That is the worst-case scenario that probably won’t happen.
For Apple to even appeal this ruling offers Steve Jobs' brainchild a rare dose of reality in China, and the bruised Apple brand will go back to the drawing board after receiving severe harm to its previous image of an ultra-luxury brand on the Chinese mainland.
For other American companies, there is no way to flush out additional clarity, and they will get stonewalled if they want more details regarding the path forward and that in itself will damage the price action of stocks tilted towards China because of the wave of uncertainty.
At the extreme minimum, this escalation of pressure will make it arduous to maneuver to some sort of trade agreement let alone in the abbreviated 90-day window agreed on in Buenos Aires.
The Chinese national psyche cares a great deal about saving face and this dig at its national prize will be hard to forget.
And China has a habit at looking at these types of events as inclusive actions tallied up broadly inside a comprehensive portfolio labeled and pigeonholed as America, Canada, and so on.
This conspicuous move has pushed forward Canada into the forefront of the firing line which could become the silver lining to this quagmire because Canada will have more incentive to join in on the China rebukes with America if they get blacklisted by Beijing.
Uniting together as one pan-North American and the European task force would be the best method to combat China’s stealthy business acumen whose capital and influence are far-flung and hard to quantify because of its various gateways to global western pressure points.
I can tell you right now that after doing a quick jaunt of Belarus, the Ukraine, and Hungary this winter, China’s deep pockets and nationals have completely taken over Central and Eastern Europe.
Chinese companies and products are plastered all over the place in each Russified city center and cityscapes built in the Soviet era.
Chinese students and workers have flooded these markets as they line up around the fringes of the Western world armed with gobs of capital and a land-grab mentality that borders Amazon’s ambition.
The Budapest property market has been cornered by Chinese citizens looking for the cheapest entry point to permanent residence in the Eurozone.
If you want to rent a flat in Budapest, odds are a Chinese owner will be glad to accept your monthly rent payments.
China believes that to truly have its tentacles deep inside the Western apparatus, they must initially corner the peripheries of the Western World that thirst for capital to build up local economies to match the power and stature of the Western big boys.
This has all added up to the Chinese government having an influential voice in European affairs because they have direct sway with conservative Prime Minister of Hungary Viktor Orban who has accepted Chinese capital.
US executives are praying to the celestial heavens that Meng is not extradited to America and made the scapegoat of the broader trade war.
This would be a bitter pill to swallow for Huawei’s founder Ren Zheng Fei whose family is considered royalty inside the upper-level Chinese establishment.
I assume that Ren will not back down quietly and is pushing and pulling the behind-the-scenes levers to do what he can for his daughter.
What does this all mean?
Headline risk has shot through the roof and investors could hear any day of the rumblings to the next chapter of the trade saga that is enveloping more and more corporate collateral damage.
Apple’s next quarter’s earnings are also on the line, and CEO of Apple Tim Cook could conveniently use it as a throwaway quarter hyping its progression as a new software and subscriptions company which is indeed in the works.
I figure this is the base case for Apple especially if there is no quick solution to this new iPhone ban.
The transition has been dramatically painful and happened a year or two too early for Apple’s liking.
Consequently, Apple reigning in its expectations has crushed the stock recently.
Certain global banks could set to be punished after the Wall Street Journal reported that HSBC and Standard Chartered facilitated the illegal payments for Huawei.
The British bank problems don’t stop there with Britain as a country barreling towards a complete ban of Huawei products after New Zealand just announced their own ban.
The three biggest Japanese telecommunication companies dumped fuel on Huawei’s bonfire citing security issues for excluding Huawei products from Japanese 5G development.
The roller-coaster action could also give impetus to Chairman Xi to execute a power grab on Chinese domestic technology sector gifting him additional control over tech behemoths in the name of national security fortifying his multiplying power in China.
He did the same with the People Liberation’s Army and I see no reason why he wouldn’t do the same with the Chinese tech sector especially if western countries avoid Huawei products.
The Chinese regulatory presence has already reared its ugly head banning new video game licenses to Tencent slashing revenue streams in 2018.
That is why Tencent shares have grossly underperformed this year.
Theoretically, Xi could use this moment as a springboard to seize the reigns of Huawei citing illegal payments to Iran which would calm the trade tensions but beef up his clout in the tech community, a net negative for Silicon Valley.
In any case, there is substantial amount of uncertainty permeating the heart of the technology movement that could potentially splinter off violently into an American tech and Chinese tech world.
This hard landing would deprive China-based revenue and kill supply chains for American technology that have spent decades procuring these intricate systems.
For Chinese technology, they could be cut off from the important components required to develop the technology and chips they need to achieve its “Made in China 2025” state-subsidized targets aimed at rapidly expanding its high-tech sectors and developing its advanced manufacturing base.
The next few months will reshape the 2019 Silicon Valley landscape and certain companies are hoping their business models aren’t fully destroyed.
I can’t lie but I saw this coming when I became aware of the complicated relationship between foreign tech companies and its precious Chinese revenue, and I also never bought another Coolpad smartphone.
“If you don't jump on the new, you don't survive.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Fund Trader John Thomas was interviewed on a major news network a few days ago talking out the state of the global financial markets. I thought you would be interested in the Q&A that followed.
Q: Bonds (TLT) have come down a lot on sudden flight to safety bid, with the 30-year yield under 2.9%. Do you see yields going back up in the short term?
A: Absolutely, yes. This is a one-time only panic triggered by the failure of the G-20 Summit in Buenos Aires. And we got the second leg down from the arrest of the CFO of Huawei, one of China's biggest companies, so that has triggered a short-term panic. It's temporary and we're going to bounce back strong. In fact, we already have. Now is a great time to be shorting bonds and buying stocks.
Q: How bad are things at Facebook (FB)? Is the bad news priced into the stock?
A: No, all the bad things are not priced into the stock. That’s why we are telling people that Facebook is a “No touch.” Bad news seems to come out every day, it’s a black swan a day stock, you don’t want to be anywhere near it. They will get some regulation, but nobody knows what it is, or how much it will affect profitability. But when a big company has to change their business model in a hurry, you don’t want to be anywhere near it. Far easier to buy it on the way up than on the way down.
Q: Will a cut in the oil supply by OPEC stem the spiraling down price of Oil (USO)? Is there a trade here?
A: “Yes” to both questions. OPEC will probably announce some sort of price cut/production cut in the next meeting which will get prices off the floor. Everyone ramped up their production to try to beat price falls which then makes the price fall worse, which is always what happens. So, yes, I would be buying oil here. I'd be buying oil stocks here too. There is your trade.
Q: Will the markets hold the February Lows?
A: Yes.
Q: If it does not hold, how far can it fall?
A: Worst case, you may get a fall straight down sucking all the sellers. But if you flip the algorithms to the buy side then it’s off the races. Markets have a habit of doing that quite a lot this year, so I think the lows have been made and you want to be buying stocks here. The fundamentals behind the market are just too strong to get beyond what algorithms are doing, what damage algorithms can do on a day trading basis. So yeah, I don't think that we're going to new lows, these are the new lows right here.
Q: Do you see an American Recession by the end of 2019?
A: Yes, I see the bull market ending in the next 3 to 6 months and recessions starting after that. That said, there is plenty to be made on the upside in coming months and then there's a ton of money to be made on the downside after that. That’s when you want to be attending my short selling school which you also get with a subscription to my service.
Q: Will the Chinese (FXI) allow the Yuan to collapse to fuel imports AND stimulate their GDP growth rate?
A: Yes. They have largely offset all of the import duties imposed by the US by depreciating their currency by 10%. If we raise duties more, they'll just cut their currency value by the same amount, so the actual dollar landed price is unchanged. There's nothing the US can do about that. We're already playing our best cards so it’s not like we can do to retaliate if they devalue their currency more. That’s the problem you have shooting all of your arrows on the first attack.
Q: Would you rotate some growth to value-based stocks on the expectation of interest rising next year in crush and grow stocks.
A: You got it half right. I would sell the high growth stocks into the next big rally, take my profits, and then go into cash! You don't want to own defensive stocks in bear markets, you want to own cash. Defensive stocks go down in a bear market, only at a slower rate, but go down they do nonetheless. Cash is king. You can earn 3 or 4% on your cash these days. That is much better than a stock that is going down.
Q: I bought General Electric (GE) about a year ago at $17, and I thought it was a great deal at the time. Unfortunately, it was not, so can (GE) go any lower than it is now? I thought it would hold $10 dollars but then they cut their dividend to one cent and the shares have cratered to seven dollars. What should I do?
A: You're kind of asking me what to do after you close the barn door and the horses have already bolted. If you have (GE), I would keep it at seven dollars. The worst thing, it goes sideways from here. The best case is you get a strong rally and the stock doubles in coming months. This is not a chapter 11 situation as they have too many assets. It’s just a matter of how quickly they can turn around the company. By the way, we told people to stay away from (GE) from $31 all the way down to when it got to single digits. So, we missed that buy every dip mentality in (GE). Thank goodness for that.
Q: Why won’t banks benefit in a rising interest rate environment?
A: The answer is very simple. These are the new buggy whip makers. You don't want to own big banks as they're hobbled by these gigantic branch networks which cost a fortune, and which are all going to disappear in ten years. Fintech companies like Square (SQ) and PayPal (PYPL), these little tiny apps that you've never heard of, they're eating the banks’ businesses one by one. And by the way, even though interest rates are rising, loan volume is falling at a faster rate, so they're making a lot less money than they used to. They're not really allowed to trade markets anymore because the risk is too high. So, even if they knew how to trade markets, they can’t rely on those earnings like they used to. So, avoid the banks like the plague.
Q: Is there any scenario you see stocks rising 10% next year?
A: No. Absolutely not. We're trying to call the top of a 10-year bull market here. The total return on the market in 2019 will probably be negative and could be negative by quite a lot. Maybe by 10%, 15%, or more. So yeah, if you're hanging on for new highs, I would give up that theory and find another one. It could be a very long wait, like a five-year wait before we go back to the old highs we saw in September and before that in January.
Q: Will Geopolitics drive the market more than it did in 2018?
A: Absolutely, it will. In the geopolitics category, you can include the China trade war, the Europe trade war, the possibility that Congress does not approve the new NAFTA. There's a ton of new things that could go wrong next year. And by the way, the burden of proof is now on stocks to prove how good they are. Risk is rising in the market and volatility is rising, but there still is good money to be made for a year-end rally.
Q: Why has gold (GLD) not performed so far?
A: We don't have inflation and gold really needs to get a good ramp up in inflation to get some serious price performance. That said, I expect a return in inflation. The economic data you get lags reality by anywhere from 3 to 6 months, so you will get a rise in inflation well above 3%. That’s when you really start to move on gold, that’s why I'm saying buy the dip.
Q: Would you buy the dollar (UUP)?
A: No, I would not. It’s looking like we have a couple of interest rates rising next year. The dollar will remain strong into that but in some point next year in the whole strong dollar story disappears as the rise in interest rates stops. If the interest rates level, all of the weak dollar plays will take off like a rocket. Those would include the Euro (FXE), Yen (FXY), and emerging markets (EEM). So, watch those spaces very carefully. There are gigantic moves coming in all of those once we stop raising interest rates and once the dollar peaks out.
Q: Will we close at the lows of the year?
A: No, we will not. The lows of the year probably happened right before this interview. I expect a strong rally from here driven by algorithms. Yes, they work on the upside just as well as they do on the downside side. In fact, algorithms really don’t care which way they go just as long as they go.
Q: What securities do you cover?
A: We cover stocks, bonds, commodities, precious metals, real estate, and every trade alert has a recommendation for a stock, an ETF, and an options trade so that way you can tailor the trade alert to meet your own experience level and risk tolerance.
Q: When does the letter come out?
A: It comes out roughly at midnight EST every day before the next trading day. That way early risers can read the letter and then enter their trade alerts at the market opening. It also helps the Europeans read it as their day starts. We have a big following in Europe and an even bigger following in Australia so that is the answer to that question.
Q: Can beginners with no previous experience use your service?
A: Absolutely. Training beginners how to enter the markets for the first time is one of the primary goals of this newsletter. We have customers that range in size from $20 billion dollar hedge funds all the way down to students trading off their dorm room beds with minimal one-contract trades. So yes, it’s for everybody and every trade alert that we send out has a link to a video showing you exactly how to execute this trade on your own trading platform
Q: Are you an algorithm?
A: Well, if I made a machine noise that would help. All I can say is come to one of my global strategy luncheons. You can pinch me and if I bleed, I am real.
Q: You obviously have enough money, why do you do this?
A: Leveling the playing field for the average guy is why I do this. When I worked on Wall Street, I saw so many people get ripped off it used to make me sick. So, this is my chance to get even. Helping you learn how to make money is my way of getting even. That's why I do this.
At the beginning of the interview, I promised you a seasonal trade alert, here is one of the most popular ones, Buy Home Depot (HD) in the Summer before the hurricane season. That’s good every year for a 15% rally and that’s exactly what we got this year. A 15% rally, 2 big hurricanes, big profits, goodbye, and then see you again next year.
Q: Thank you for coming today, John. It was a real pleasure.
Global Market Comments
December 11, 2018
Fiat Lux
Featured Trade:
(JOHN THOMAS TV INTERVIEW Q&A)
(TLT), (FB), (USO), (GE), (PYPL), (SQ), (HD), (UUP), (FXE), (FXY)
Mad Hedge Hot Tips
December 10, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) There is $79 Billion Worth of US Treasury Bonds for Sale This Week. Will there be any takers? This could signal a medium-term high in prices and low in yields, at 2.85% for the ten years, a six-month low. Click here.
2) China Summons US Ambassador Over the Huawei Arrest. Someone is about to be taken out to the woodshed. Stocks hate it. Click here.
3) The US Targets March 1 as a Hard Deadline on China Negotiations. The market didn’t want to hear this either. Advisor Peter Navarro says this is when they will fail. I wouldn’t mind except this is exactly when my ”head and shoulders” top for the ten-year bull market is expected. Click here.
4) Uber Races to Beat Lyft With its IPO. The first one to market will get the premium valuation. Don’t touch either until they have dropped by half. Click here.
5) Facebook is Struggling to Put in a Bottom on its Stock, though buying an additional $9 billion worth of shares. It won’t turn around because there are suddenly a lot of new users. Avoid. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or WHERE IS SANTA CLAUS?),
(INDU), (SPY), (TLT), (AAPL)
(IT’S ALL ABOUT THE CLOUD)
(OKTA), (ZS), (DOCU), (INTU)
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
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