Mad Hedge Technology Letter
May 14, 2018
Fiat Lux
Featured Trade:
(MEET THE NEW FANG),
(AMZN), (WMT), (FB), (NFLX), (GOOGL), (UBER)
Watching Sotheby's sell off the possessions of David Rockefeller, the memories came flooding back.
A Picasso went for a staggering $115 million, while a Monet fetched $80 million. A leather easy chair estimated at $300 sold for $8,000.
I've seen then all, either at the downtown headquarters of Chase Manhattan Bank, which Rockefeller turned into an art museum, or at dinner parties at his posh Upper East Side mansion.
I was sitting across the desk from Bob Baldwin, the chairman of Morgan Stanley. It was 1982, and I was 30 years old.
He carefully studied my resume in his hand. Then he picked up the phone and hit a button on speed dial to call David Rockefeller.
Rockefeller, the chairman of Chase Manhattan Bank, picked up.
Baldwin said, "I have a John Thomas sitting in front of me." He paused a second, and then hung up.
"He says you're alright," and Bob offered me a job on the spot to get the firm into the international equity business.
That's how I started a long and illustrious career at Morgan Stanley.
I eventually became one of the most successful traders in the company, and at one point accounted for 80% of equity division profits.
It is also where I learned the knowledge that I am passing on to you today through the Diary of a Mad Hedge Fund Trader and my trade mentoring service.
I have David Rockefeller to thank for getting me started.
So, it was with a heavy heart that I learned that he passed away recently at the ripe old age of 101.
Rockefeller was the youngest grandson of oil baron John D. Rockefeller, the founder of the Standard Oil Company. The modern-day spin-offs include ExxonMobil, Chevron, Amoco, and parts of British Petroleum.
The Sherman Antitrust Act was passed specifically to break up Rockefeller's oil refining monopoly.
Rockefeller was America's first billionaire.
Rockefeller could have had an easy life of moneyed leisure in high society.
He chose otherwise.
He grew up in a Manhattan 54th Street mansion attended by armies of nannies and servants, where his parents dressed black tie for dinner every night.
He remembers his doting grandfather, John D., who only gave him dimes "to keep us thrifty."
His mother founded the New York Museum of Modern Art in 1929, for which Rockefeller became chairman in later years.
He took the trouble to get a PhD in Economics from the University of Chicago in 1940, supporting Franklin Delano Roosevelt's deficit spending to end the Great Depression.
The family was horrified, as FDR's 90% maximum tax rate substantially whittled down the family's fortune by the time John Kennedy repealed it in 1962.
I got to know David Rockefeller well during the 1970s when I covered U.S. banking for The Economist magazine, and he spearheaded Chase Manhattan Bank's aggressive international expansion.
Rockefeller became the unofficial ambassador for the brash, unvarnished capitalism of the day. He wreaked establishment.
For a decade, whenever I interviewed major world leaders, such as Zhou Enlai of China, Ferdinand Marcos of the Philippines, Emperor Hirohito of Japan, or Margaret Thatcher of Great Britain, I would often bump into Rockefeller on the way out.
It was a bygone era, when major clients were courted primarily through the social register.
Eventually, international business came to account for 80% of Chase Manhattan's total profits.
It is perhaps fitting that Rockefeller was an early supporter of the construction of the original World Trade Center in downtown Manhattan, just walking distance from his bank.
I used to meet Rockefeller in his cavernous office on the 65th floor of the Chase Manhattan building near Wall Street. He sat behind a polished hardwood desk the size of Montana.
Also known for his immense art collection, almost every floor of the building was decorated with favorite pieces from his personal collection. There was even a Chagall on the way to the men's room.
In perhaps the greatest compliment every paid me, he told me he had 70,000 names in his Rolodex, and I was one of them.
Wow! To be in David Rockefeller's Rolodex! Did you get that mom?
Rockefeller was always charming and gracious to a T. He was the guy who was friendly to everyone, with a great sense of humor, even when he didn't have to be.
He was offered the post of U.S. Treasury Secretary by multiple administrations and turned them down every time. He preferred to spend more time on his prized collection of beetles instead, the largest in the world.
He worked well into his 90s and maintained an office on the 56th floor at Rockefeller Center, which his father had built to create jobs in New York during the Great Depression.
Because I was one of a handful of Morgan Stanley officers who spoke fluent Japanese, I was recruited to the team that sold Rockefeller Center to the Japanese for $1.3 billion in 1989. It was one of the largest real estate transactions in history at that time.
The last time I saw Rockefeller was at a gala black tie event for his 90th birthday at the Museum of Modern Art, where tables were selling for $90,000 a piece.
Rockefeller used the event to announce a staggering $100 million gift to the museum.
So, thank you David Rockefeller for all your help, and a life well lived.
They don't make them like you anymore.
You will be missed.
"It's easier to get out of Cuba than to get out of Facebook," said a market analyst.
Yes, it's Wal-Mart (WMT).
No, I'm not making this recommendation because they let you park your RV in their parking lots at night for free.
And no, I'm not smoking California's biggest cash crop either (it's not grapes).
I predicted as much in my recent research piece, "Who Will Be the Next FANG?" by clicking here.
It is the dawn of a new era with the world absorbing yet another FANG to add to the list of Facebook (FB), Alphabet (GOOGL), Amazon (AMZN), and Netflix (NFLX).
As the tech world powers on to new heights, nothing can slow down these juggernauts.
Let's face it - companies are more lucrative when technical expertise is ramped up and infused into the business model.
Ground zero of the tech movement - Silicon Valley - has helped supercharge the economy and prodigious earnings' results support this thesis.
New innovations will fuel the next level up in the tech arm's race but more crucially, so will new geographical locations.
Instead of throwing a dart at a world map, the locations are a no-brainer because tech scavenger hunts orbit around one idiosyncrasy and that is scale.
Scalability is a sacred word in the tech world.
If a start-up cannot scale up, investors can't imagine future profits, entrepreneurs can't imagine growth, and funding dries up.
End of story.
For instance, Amazon's business model does not mesh kindly with pint-sized Iceland.
Not because Amazon discriminates against Iceland's culinary delicacy of sheep testicles but because the population is only around 330,000 people.
Scale equals success.
Indisputably, every country with an Amazon-esque business is being bid up because big tech firms know how to digitally monetize, effectively out-sourcing an incredibly profitable business model that has worked unabated for the developed world for the past decade or two.
The heightened awareness of existential survival is pitting foreign money against each other in far-flung places jostling for the same digital assets after a decade of cheap financing enriching tech companies.
Remember that first mover advantage leads to dominance in the datasphere because the volume of data is directly correlated to the bottom line.
Examples are rife around the world, for instance Amazon's $580 million purchase of Souq.com, described as the Amazon of the Middle East headquartered in Dubai and the biggest e-commerce site in the Arab world.
E-commerce commands a paltry 2% of sales in the region. That number is poised to explode as digital-savvy, tech Millennials reach peak consuming age and the migration to mobile erupts.
A preemptive strike is usually the most compelling strategy for large cap tech as it pushes out the smaller players, which lack the resources to compete.
Even the corporate offices of Walmart (WMT) in Bentonville, Arkansas, would wholeheartedly agree with me after doling out for its new toy.
Yes, Walmart acquired a 77% share in the Amazon of India, Flipkart, for $16 billion after the real Amazon failed to cut a deal with the most famous e-commerce unicorn in India.
This new development is a game changer.
India is a country that tech executives pinpoint as the future because of its massive population, economic growth, and economic potential foreign investors hope to tap up.
The International Monetary Fund (IMF) has anointed India as the fastest growing economy in 2018, and the 7.4% growth this year will follow with an even sturdier 7.8% in 2019.
Amazon has been well aware of India's ascent. Its CEO Jeff Bezos pledged to invest more than $5 billion in India and Amazon began its e-commerce operation in 2013.
Amazon's early entrance into the Indian e-commerce industry has paid off grabbing 31% of market share putting it in second place behind Flipkart's 40%, according to big data firms.
The Indian e-commerce space was $20 billion in 2017, and by 2019, expect that number to grow to $35 billion.
Walmart CEO Doug McMillon noted that by 2026, the Indian e-commerce industry will surpass $200 billion. When it comes to clothing and fashion, Flipkart has a 70% share in India.
Even more valuable than the economic growth is the new pipeline of tech talent that will help Walmart compete with Amazon.
The Trump administration's crackdown on H-1B visas that Silicon Valley utilizes to bring developers to American shores has forced American tech companies to implement a work-around.
Essentially, the only difference now will be that the past recipients of H-1B visas will be sitting in an air-conditioned office in Bengaluru, India, until the visa documents come through.
Flipkart has a deep pipeline into the best engineering schools in India and the staff of more than 30,000 employees work on Indian wage levels.
This deal is one of the biggest talent grabs of tech developers the world has ever seen. And this group has the know-how of building an Amazon-style digital marketplace platform from zero.
The Flipkart investment comes after Walmart's purchase of Jet.com, an e-commerce company based in Hoboken, New Jersey.
The $3.3 billion purchase of Jet.com in 2016 was the beginning of Walmart's digital strategy, and it has come a long way in a very short time.
Walmart is now a vaunted member of the FANG group and has a new army of developers to back up this claim.
Glancing at the opportunities to scale, Indonesia is clearly the runner-up behind India.
Indonesia has been tagged as a tech new battleground with a population of 260 million in 2016 and growing.
The country has a medium age of 28, meaning this young population could turn into a reliable source of new tech developers who traditionally are young and digital natives.
Economic prosperity has been welcomed with open arms to this tropical island nation. It is poised to become the seventh largest economy by 2030, up from its rank of No. 16 today, creating a burgeoning middle class with newfangled discretionary spending.
The rural migration to urban environments will add another 90 million people living in Indonesian cities by 2030, while Internet access is growing by 20% each year in Indonesia.
Goldman Sachs recently issued a note to investors citing Indonesia's unbridled potential.
Capital is pouring into Indonesia at a breakneck speed with Alibaba investing $1.1 billion into Tokopedia, the Amazon of Indonesia.
Companies are coming to the stark realization that the domestic low hanging fruits have been picked, and aging developed countries are turning to undeveloped regions of growth to advance business objectives.
This is why South East Asia has been bombarded with an onslaught of Japanese, Korean, and Chinese investments and not only in the tech sector.
The Far East powerhouse countries are battling each other in Southeast Asia for consumer goods, infrastructure, high speed trains, and of course technology.
Uber just sold its Southeast Asian ride-sharing asset Grab to China's DiDi Chuxing and SoftBank for $2 billion.
The Southeast Asian region is one of the hottest places to make a deal because of a lack of FANG occupancy.
Walmart sold off on the Flipkart news because of the potential impairment to margins, but this move is a long-term positive for Walmart shareholders.
Flipkart does not turn a profit and Walmart is still solely judged by earnings. Unfortunately, it does not receive the same license to focus on growth like Tesla, Amazon, and Netflix.
However, I have a hunch that down the road, investors will agree this move by Walmart's McMillon was as shrewd as can be.
Like the colonial powers of yore, India and Southeast Asia are likely to be divvied up.
American companies already own more than 70% of market share in India e-commerce.
India is the biggest democracy in Asia and a staunch ally of the United States.
India's frosty relationship with China due to border spats and communist origins will stunt China's ability to take over and expand in India.
However, Southeast Asian countries are more likely to go the way of Cambodia, which is reliant on Chinese money to fund new initiatives, hamstrung by Chinese debt up to its eyeballs, and acquiesced political capital to the Mandarins.
Chinese investment's path of least resistance is Southeast Asia. This progression will be facilitated by the sizable Chinese expat population that resides in Indonesia, Vietnam, Thailand, Philippines, Myanmar, Laos and Cambodia.
Long-term shareholders of Amazon and Walmart will be rewarded. However, expect a few more Indians walking around Bentonville, Seattle, and Hoboken.
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Quote of the Day
"My life is now a constant assessment of whether what's happening in real life is more entertaining than what's happening on my phone." - said television host Damien Fahey.
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
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
Global Market Comments
May 11, 2018
Fiat Lux
Featured Trade:
(WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON),
(MAY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(FB), (MU), (NVDA), (AMZN), (GOOGL),
(TLT), (SPX), (MSFT), (DAL),
(MAD HEDGE DINNER WITH BEN BERNANKE)
Come join me for lunch at the Mad Hedge Fund Trader's Global Strategy Update, which I will be conducting in Philadelphia, PA, on Wednesday, June 13, 2018. An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I'll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I'll be throwing a few surprises out there, too. Tickets are available for $238.
I'll be arriving at 11:45 AM, and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at an exclusive downtown private club. The precise location will be emailed with your purchase confirmation.
I look forward to meeting you and thank you for supporting my research.
To purchase a ticket, please click here.
Below please find subscribers' Q&A for the Mad Hedge Fund Trader May 9 Global Strategy Webinar with my guest co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Would you still short Facebook (FB)?
A: Right now, no. I thought the dynamics changed off the last earnings report, so the answer is no. We have made a ton of money trading Facebook this year, and all of it has been from the long side.
Q: How will the election affect the market?
A: It will go down into the election, but you'll then get a strong rally as the uncertainty fades away. It really makes no difference who wins. It is the elimination of uncertainty that is the big issue.
Q: Do you have a price to buy Micron Technology (MU) or NVIDIA (NVDA), or do you want to wait for a crash day?
A: I want to wait for a crash day, because even though these are great companies, on the down days, they fall twice as fast as any other stock. Your entry point is very important in that situation.
Q: Do you see opportunities to sell short the U.S. Treasury bond market (TLT) again?
A: Yes. But wait for the four-point rally not the two-point rally.
Q: Rising interest rates should benefit banks - why are they such horrible performers?
A: The double in bank stocks in 2017 fully discounted this year's interest rate move. For banks to really perform interest rates have to move higher still, which they will eventually.
Q: When will the yield curve invert and what will be the implications?
A: You can take the Fed's current rate of interest rate rises (which is 25 basis points every three months) and essentially calculate that the yield curve inverts at the end of 2018 or the beginning of 2019. Recessions and bear markets always follow six months after that inversion takes place. That's when interest rates start to rise very sharply as bond investors panic and unwind all their leveraged long positions.
Q: Why are you not involved with Amazon (AMZN) and Google (GOOGL)?
A: I've already taken big profits in both of these and I'm just waiting for another serious dip before I get back in again.
Q: What happens to stock buybacks?
A: While other investors are pulling out of the market, stock buybacks are doubling. But, that is only happening, essentially, in the tech stocks - they're the buyback kings. If you don't have a serious buyback program this year, your stock is falling. Companies are the sole net buyers of the market this year, and they are only buying their own stocks.
Q: What do you see the upper and lower end of the S&P 500 (SPY) range to November?
A: I think we've already got it: 2,550 on the low side, 2,800 on the high side - that a 10% range and you can expect it to get narrower and narrower going into November. After that, we get an upside breakout to new all-time highs.
Q: When will rates be negative next?
A: In the next recession, the bottom of which will be in 2 to 2.5 years; that's when interest rates in the U.S. could go negative, as they did in Japan and Europe for several years.
Q: What is your No. 1 pick in the market today?
A: We love Microsoft (MSFT) long term. However, right now the background macro picture is more important than stock selection than any single name, so we're keeping a position in Microsoft in the Mad Hedge Technology Letter, but not in Global Trading Dispatch. We're sort of hanging back, waiting for another sell-off before we touch anything on the long side in GTD. Remember, the money is made on a buy in the new position, not on the sell going out.
Q: Was the semiconductor chip sell-off overdone?
A: Absolutely - the negative report was put out by a new analyst to the industry who doesn't know what he's talking about. If you ask all the end users of the chips, all they talk about is A.I., and that means exponential growth of chip demand.
Q: Is it a good time to buy airline stocks (DAL)?
A: No, until we get a definitive peak in oil, and a speed up again in the economy, you don't want to touch economically sensitive sectors like the airlines.
Mad Hedge Technology Letter
May 11, 2018
Fiat Lux
(COME MEET JOHN THOMAS AT HIS GLOBAL STRATEGY LUNCHEONS)