Mad Hedge Technology Letter
September 11, 2018
Fiat Lux
Featured Trade:
(IS IT TIME TO PICK UP THE SLACK?),
SLACK WORKSPACE APP
Being a stone’s throw away from the pulse of Silicon Valley, I have been showered with acute insights to which I otherwise would be oblivious.
This finely developed acumen is vital to keep my head above water and offer insights unfounded in any other newsletter.
The margins of victory and failure are becoming finer with each passing day, and that goes tenfold for the hyper-cutthroat trading world where each investor fights daily for his crust of bread.
The same thin margins apply for the tech industry whose prodigious march to profits has dwarfed any other industry.
Its far-reaching effects has brought forth social change unparallel to any other time in history.
The Mad Hedge Technology Letter has chronicled the messenger platforms rolled out by public companies such as Facebook and Snapchat, and their lust for profit extraction from every corner of the globe.
But there is another war going on in one nearby corner outside of our social lives I have yet to touch upon that will have profound consequences.
Enter the office.
The battle for hegemony in the workplace to evangelize a supreme workplace app is a big deal.
The office is where most semi-sober, semi-sane adults make a living, and where they allocate the lion’s share of sunlight hours before they mosey on home.
Slack, a workspace messenger app, has become the dominant way to communicate with professionals using collaborative messaging services, and offering integration with all legitimate apps that workers leverage to get work done.
After another round of fundraising, the company is now valued at more than $7 billion.
The $7.1 billion price tag is $2 billion more than the price only last September when Masayoshi Son’s SoftBank dipped its toes in to the tune of $250 million.
Overall, the company has at least 41 investors to its name.
This latest $427 million capital injection was led by Dragoneer Investment Group and General Atlantic, both private equity groups on the forefront of investing in transformative Silicon Valley firms.
Employees’ appetite for enterprise software has mushroomed in recent times, highlighting the dire need for progressive workplace apps liaising with other major productivity applications.
The smooth display interface and ease of use has spawned a monumental rush inside offices to adopt this sleek looking app called Slack.
Competition is coming with Microsoft and Facebook intent on disrupting Slack’s newfound success in the workspace area.
Slack is one of the most popular apps distributed by start-up companies and the numbers back it up.
The company has blown by 8 million daily active users (DAU).
Considering Slack only had 1 million users three years ago makes this feat even more impressive.
Of the 8 million (DAU)s, 3 million are paid subscribers.
Slack follows the freemium model such as other tech firms like Spotify, which lure customers in for free and allow access to its platform.
The free users are the biggest source of converts to its paid reoccurring subscription revenue.
Slack proves its worth by enhancing each product iteration based on diligent analyzation of customer feedback.
A no-brainer for many firms, but you would be surprised how many companies forgo this critical source of data.
Slack streamlines the process of communicating with work buddies.
No matter what industry or specialization with which you grapple, Slack makes it easy to share information over its platform.
In fact, Slack is an acronym for “searchable log of all communication and knowledge.”
Workplace portals can be initiated right away around projects or assignments, and the sense of team bred through this innovative communication channel offers the impetus for coworkers to contribute immediately.
Speed is money in tech land, and Slack gives a reason for coworkers to shun emails all together.
Being a customer-centric workplace app, any malfunctions in the harmony of its operations are met with instant patches of fixes so workers can carry out their time-sensitive tasks.
Other advanced functions aiding workers is the advanced search function allowing users to search for messages that were sent days, weeks, months, or even years ago.
Slack messages accommodate the trend for replying using a hoard of emoji’s, which has become a standard response as the emoji has taken a life of its own in the business world.
It has been found through surveys that emojis are a more effective way to respond to messages that need a blunt opinion.
Millennials are the tech-savvy generation that christened emojis as a normalized way of communication, and they are Slack’s target audience.
Another function allows users to type short code into its interface, triggering the software to remind users of a task and at a specific date and time.
Fastcompany.com smartly described Slack as “a virtual mash-up of the conference room and water cooler, with a pinch of corner office chit-chat.”
Slack is known for uber-productivity.
And if it’s something that a top-quality worker should harness such as referencing, enhancing, prioritizing, delegating, sharing, or creating - the app facilitates these traits seamlessly.
Slack certainly will boost the productivity of your team’s performance once the team gets a hang of its tools.
The emphasis of enterprise collaboration will continue as more work teams band together remotely.
This app perfectly captures functionality and meets the needs from companies where all users are online and live in different time zones.
If Slack continues evolving at its current speed, it could shortly wipe out emails.
Emails are a legacy type of communicative tool for companies, and its outdated interface is ripe for disruption.
Gmail’s disciples must have noticed that the past few iterations of Gmail have looked more and more like Slack, as it steals from other workplace app functions to upgrade its own workplace services.
All of this explains why Slack has been adding 2 million users per year and still has enormous potential for further disruption and growth.
Most early-stage companies are massive cash burners.
Reports from Didi Chuxing, the Chinese ride-sharing firm that bought out Uber in China, exposed the double-edged sword of being an up-and-coming tech firm.
Growth is often put up on a pedestal with profits relegated to the sidelines.
Even though Didi Chuxing is the dominant player in China, the exorbitant subsidies dished out to scarce drivers have devoured cash flow metrics.
Didi Chuxing has lost an astonishing $580 million in the first six months of 2018.
Slack is cash-flow positive.
An extraordinary accomplishment for an industry littered with firms exercising their industry right to spoon feed excuses of indulgent losses until their IPO day.
Even more impressive, Slack is only 5 years old and has already signed up more than 70,000 workgroup teams for its platform.
Slack has avoided even talking about going public, and this is bad news for retail investors hoping to get in on the action.
The carnage that tech firms have faced in front of Congress and in the press have budding tech firms rethinking if it’s worth opening themselves up to such torturous criticism.
Mark Zuckerberg is now the whipping boy on Capitol Hill.
Why risk it when bountiful funds await through venture capitalist coffers chomping at the bit to pay a premium for the latest hot tech company?
Elon Musk’s personal meltdown does not help either.
Sadly, it will be years before Slack chooses to go public - and most likely when the business becomes ex-growth.
Yes, it’s unfair to the average Joe, but life is unfair.
Money talks and as Slack feeds back its fresh capital into energizing its product, the valuation will rise to epic heights along with its DAU numbers.
If your office isn’t using Slack yet, it will soon.
Or…it’s probably not a modern place to work.
To visit its official website and sign up for free, please click here.
________________________________________________________________________________________________
Quote of the Day
“You should learn from your competitor, but never copy. Copy and you die,” – said Alibaba cofounder Jack Ma.
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
September 10, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Leslie Moonves Leaves CBS (CBS). He just couldn’t keep his hands off the merchandise. Another CEO leaves for playing nookie in-house. Too bad, because he was the best CEO in the industry. A $120 million golden parachute kicks in. Stock dives 4%, stay away. Click here.
2) The Richest Man in China Retires. Alibaba (BABA) founder Jack Ma decides to go spend his $40 billion. Only in China! Maybe it’s time to get out of Dodge. His stock also dives 4%. Click here.
3) Trump Tells Apple (AAPL) to Make Phones in the U.S. Here comes your $2,000 iPhone. It will never happen as talk is cheap, but this is why I’m out of the stock. Click here.
4) Markets Rally on Promise of More Tax Cuts. Yes, it’s called “Tax Reform 2.0”, and it will add another $1.5 trillion to the U.S. deficit. Sell Short more U.S. Treasury bonds (TLT). Click here.
5) Lehman Brothers Bankruptcy 10-Year Anniversary. How time flies! Expect a lot of 20/20 hindsight today. Boy, I’m glad I got out of that one early! Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON
GLOBAL STRATEGY LUNCHEON INVITATION),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or “IT WASN’T ME!”),
(AMZN), (NKE), (SPY), (PCG),
(GOOGLE’S BREAKFAST OF ROTTEN EGGS),
(TWTR), (FB), (GOOGL), (MSFT), (AMZN)
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
September 10, 2018
Fiat Lux
Featured Trade:
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON
GLOBAL STRATEGY LUNCHEON INVITATION),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or “IT WASN’T ME!”),
(AMZN), (NKE), (SPY), (PCG)
Mad Hedge Technology Letter
September 10, 2018
Fiat Lux
Featured Trade:
(GOOGLE’S BREAKFAST OF ROTTEN EGGS),
(TWTR), (FB), (GOOGL), (MSFT), (AMZN)
First of all, I want to confirm absolutely and without any doubt that I did not write the anonymous and controversial New York Times op-ed entitled “I Am Part of the Resistance Inside the Trump Administration.” It wasn’t me.
During the 1970s I tried to write for the Grey Lady about the Chinese Cultural Revolution, the threat to the U.S. posed by the Japanese auto industry, and the coming appreciation of the Japanese yen. But they would have none of it.
That’s because they only ran copy from their own full-time journalists and didn’t accept work from freelancers. The Wall Street Journal, Barron’s, The Economist, no problem. The New York Times, no way Jose.
Anyway, anyone with any knowledge of military aviation knows who wrote it. Yes, it’s that obvious.
I was driving over the Oakland Bay Bridge on my way to San Francisco the other day and what I saw stunned me.
This time of year, you usually see 18 enormous Chinese container ships waiting to offload their cargo at the Port of Oakland in the run-up to the Christmas shopping season. This time I saw only 10.
Either the Chinese are sending their toys, electronics, and apparel to other U.S. ports, or they are not sending them at all. If it’s the latter it means that U.S. consumer demand is about to fall off a cliff, driven away by the high prices demanded by the new 25% import duties.
I called around to see if this was just a local problem. In fact, U.S. port landings are down 10% year on year, and off by a dramatic 25% in the hardest hit ports such as New Orleans, a major agricultural exporter.
If this is true, the consequences for U.S. investors are dire.
Let me give you one of my secret trading insights borne of a half century of stock market research. Real world observations front run official government data releases by three to six months. This is why I spend so much time in the field kicking tires, chatting up store managers, and flying over auto landing docks. If this is true, you could see early signs of a recession by early 2019.
The August Nonfarm Payroll Report came in at 201,000 on Friday, with the headline Unemployment Rate unchanged at 3.9%. June and July were revised down by 50,000 jobs.
The real news here is that Average Hourly Earnings popped to 2.9%, the biggest gain in nine years, proving that inflation is edging its way closer.
Health Care added 33,000 jobs, Construction 23,000, and Transportation up 20,000. Manufacturing lost 3,000 jobs, a victim of the trade wars, while Retail lost 5,000.
The U-6 broader “discouraged worker” unemployment fell to 7.4%, a new decade low. Certainly, the job market is firing on all cylinders.
The news gave us a nice little gap down in our short position in the bond market, taking the 10-year U.S. Treasury yield up to 2.95%, a one month high.
Still, you have to wonder why the stock market behaved so poorly after the release of such a healthy number. Was it “buy the rumor, sell the news,” the September effect, or the end of the 8 ½-year bull market? Obviously, I came out of my long (VXX) position too soon.
All doubts were removed when the president delivered a sucker punch to stocks by announcing new tariffs on a further $267 billion in Chinese imports. This is on top of the duties that applied to $200 billion of imports on Monday. The trade war steps up another notch. Now ALL Chinese imports are subject to punitive U.S. duties.
Amazon (AMZN) finally topped $1 trillion in market capitalization, delivering for my followers a ten-bagger on a recommendation I made several years ago.
Nike (NKE) delivered the ad campaign of the century, led by former San Francisco 49ers quarterback Colin Kaepernick. Just think of all the new demand created in the market by all those burning shoes.
The State of California passed a bill to stick the utility PG&E (PCG) with the bill for last year’s big fires. The company will pass it on to rate payers. Thank goodness I went all solar three years ago!
With the Mad Hedge Market Timing Index diving from 78 to 52 we definitely got some topping action in the market, and our short positions paid off handsomely. Both of my remaining positions are making money, my longs in Microsoft (MSFT) and my short in the U.S. Treasury bond market (TLT).
We are off to the races in September, giving us a robust return of 1.37%. My 2018 year-to-date performance has clawed its way back up to 28.39% and my nine-year return appreciated to 304.86%. The Averaged Annualized Return stands at 34.51%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 29.59%.
This coming week only has one important data release, the Fed Beige Book on Wednesday afternoon.
On Monday, September 10, at 3:00 PM, July Consumer Credit is out and should be at an all-time high as people max out their credit cards at the top of an economic cycle.
On Tuesday, September 11, at 6:00 AM, the NFIB Small Business Optimism Index is released at 6:00 AM.
On Wednesday, September 12, at 2:00 PM, the Federal Reserve discloses its Beige Book, which includes the data from the 12 Fed districts the Federal Open Market Committee at its September 19-20 meeting.
Thursday, September 13 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw an amazing fall of 10,000 last week to 203,000.
On Friday, September 14, at 9:15 AM, we learn August Industrial Production. The Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me,
Good luck and good trading.
41.79% Trailing One Year Return
It Wasn’t Me!
In a recent interview Google CEO Sundar Pichai admitted he is “not a morning person” and maybe that was his argument for skipping out on the grilling that his contemporaries Facebook (FB) COO Sheryl Sandberg and CEO of Twitter (TWTR) Jack Dorsey received in front of Congress.
Or maybe Pichai managed to down a rotten egg that morning when eating his favorite staple breakfast “omelet with toast," because his decision to abort his date with Congress was a shocking error of judgment for a CEO that has had a flair for controversy lately.
With the whole world watching, the empty chair with a simple name tag with Google plastered over it represents the arrogance and excesses of Silicon Valley all mixed into one incongruous mixture.
This rookie move will open a can of worms for the company made famous by its search algorithm that dominates the developed world.
Google will have a target on its back going forward while creating a massive public relations backlash for a company that must fiercely defend its ad-laden profit engine going forward.
Instead of taking it on the chin like Facebook and Twitter, Google has voluntarily veered into a sticky situation, and all to avoid a few stomach wrenching questions from Congress.
How did this all happen?
In the beginning of June, Google decided to scrap its relationship with the U.S. Department of Defense.
Project Maven, as it was known, provided Google’s artificial intelligence (A.I.) technology to systematically analyze drone footage for the U.S. government.
Pichai chose to avoid renewing the contract, and Google Cloud CEO Diane Greene agreed it was a black eye for the company that applied its own technology to conspire against damaging human life.
Throwing fat on the fire, Pichai followed up by dismantling Project Maven and giving the thumbs up for code-name Dragonfly. This was a secret project aimed at the mainland Chinese market and rolling out a censored version of Google’s search engine by altering its construction of unique search algorithms for a mainland Chinese audience.
This incensed the higher-ups on Capitol Hill, as this move was largely viewed as pandering toward the Chinese communist government for monetary purposes at an uber-sensitive time between the two powerhouse nations, which remain mired in a tumultuous trade war.
The timing couldn’t be worse for Pichai.
Dragonfly is already in beta mode and could be rolled out in the near future. However, I see it as dead on arrival, because there is no hope that Google can penetrate the fortress that is the Chinese business world.
Naturally, Google employees were dismayed and shocked by these startling revelations.
Pichai’s conspicuous no-show was in part driven by the potential wrath he would have faced by these recent reckless decisions that seemed to put the American government’s interests below the Chinese communist government.
The circus was there for everyone to see.
Sheryl Sandberg put on her bravest face.
It was obvious she had rehearsed every word to the utmost precision while Dorsey vehemently guarded his brainchild with honesty and zeal.
The testimonies made social media look perceivably criminal with a congressman even hinting the reason they aren’t allowed to do business in China was mainly a business model issue, and more specifically a legal issue.
Another congressman from West Virginia suggested Facebook’s Instagram was the source of the opioid epidemic ripping apart his state.
The only thing getting ripped apart during the intense grilling was Sheryl Sandberg’s well-practiced smile.
Dorsey and Sandberg were visibly uncomfortable with the line of questioning and rightly so.
Google would have looked worse if it showed up. But it managed to look 10 times worse than that by stonewalling the government’s invitation.
In a recent Pew Survey, data revealed 44% of youth between 18 to 29 last year deleted Facebook on their mobile phones.
Facebook is already a legacy platform in the throes of disruption cannibalized by its own asset - Instagram.
Instagram will be the sole survivor of Facebook by taking out Facebook itself, and that is bearish for overall business.
And that is if social media can hang on that long before it’s taken down by the hawks circling above in Washington.
When Facebook’s Cambridge Analytica scandal broke, the government was at sixes and sevens at attempting to figure out what on earth was going on behind the smoke and mirrors of the big data theatrics.
CEO Mark Zuckerberg was let off the hook with questions he wriggled out of, and Facebook shares powered on unabated.
This time it’s different.
Regulation is an imminent threat to social media revenues and could hurt earnings this quarter.
Investors need to migrate to higher tide, meaning Amazon (AMZN) and Microsoft (MSFT), because the waves still aren’t yet reaching those levels.
Amazon and Microsoft need to send a thank you note to Alphabet for screwing the pooch.
The administration has felt it convenient to barrage Silicon Valley to solidify the Republican base, and this tactic has resonated with the administration’s diehards.
A smorgasbord of FANG-bashing was the recipe to this madness. But now sights will be zoned in on dismantling Google, and Microsoft and Amazon will benefit from avoiding nasty, gut-churning headlines that turn up in the form of Twitter blitzkrieg.
Yes, Sheryl Sandberg, Facebook was “too slow” to react to foreign interference in the elections. But it is more accurate to characterize the battle social media faces against outside nefarious forces as impossible.
It is impossible for these social media platforms to police themselves while policing the whole world.
The incessant whack-a-mole scenario is the best-case outcome for the self-policing prospects of social media.
Once social media algorithms figure out how to stopgap one method of circumvention, the bad actors will move on to a more advanced way to manipulate the algorithmic police.
What does this mean for social media?
Costs are going up and will seep into profit margins.
Highlighting the upward trend of rising expenses for social media platforms is the daily cost of keeping CEO Mark Zuckerberg safe.
And remember, he lives in Palo Alto, California, one of the safest places on planet earth with a medium household income of $137,000.
In 2017, Facebook divvied up $7.3 million for Zuckerberg’s security detail and costs associated to it.
In 2018, shareholders approved a $10 million security package to keep Facebook’s head honcho safe. This underscored the ballooning risk of leading this controversial technology forum littered with conflict of interests, and on the verge of potentially perverting western democracy.
By the end of 2018, Facebook will increase its security division from 10,000 employees to 20,000.
And that is just the beginning.
Facebook’s security division is the fastest-growing division of fresh hires at Facebook.
Before Facebook and Twitter can ring in the profits, they face an exorbitant war against foreign “bot armies” intent on muddying the free flow of accurate information on domestic shores that target individuals deemed unaligned to the foreign actor’s interests.
There will be collateral damage and lots of it.
This does not sound like an easy road to profits, and it is not.
As midterm elections creep closer and closer, Facebook and Twitter must confront elevated headline risk, and any trading day could see shares wacked with a 10% haircut.
Following the government question-and-answer period, Twitter and Facebook will be designing a new resistance to stymie villainous foreign infiltration.
Ultimately, spending the bulk of employees’ work days realigning their business models to protect democracy, instead of creating new growth drivers, is not bullish for the stock price.
It is hard to breed much confidence in social media stock’s long-term narrative after listening to Dorsey and Sandberg speak.
They kept touching on needing help from government intelligence sources to aid them in catching the miscreants.
It makes sense to gradually nationalize social media platforms to unite the disconnect between social media’s war against foreign forces and the intelligence communities war against them.
It is clear hackers are exploiting the dislocation in cohesiveness between the cracks in social media and government intelligence.
But if that ever happens, it would be the end of Facebook and Twitter as we know it, as normal users would be averse to providing free content on a government-enabled platform as well as a strong blow to democracy itself.
It all makes sense now why Dorsey and Sandberg gave the answers they gave.
Their answers were akin to a faint plea for help while appearing contrite, hoping to persuade Congress to give them more time to figure it out.
This thinly veiled attempt to elongate the profit-making process and find a solution for a problem with no solution could end badly for these two companies.
Migrate to higher quality tech names in the short-term.
The resilient American economy powers on with the heavy lifting done by Silicon Valley albeit it with fewer lifters.
If social media stocks can get through the midterm elections unscathed, there is a trade on the table for these beleaguered companies rounding out a tumultuous year.
But getting to that point will be volatile, as this group of stocks have a rocky road ahead of them for the rest of the year.
I’m Not A Morning Person
________________________________________________________________________________________________
Quote of the Day
“I'm not a regular smoker of weed. Almost never,” – said CEO of Tesla Elon Musk on The Joe Rogan Experience podcast.
Mad Hedge Hot Tips
September 7, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) NASDAQ Has its Worst Week in Five Months. And you wonder why I’m 70% in cash, with two short positions. Is the tech miracle dead? No, but it IS taking a long-needed rest. Sell tech for the short term, hold for the long term. Click here.
2) August Nonfarm Payroll Report Hits 201,000, and the Unemployment Rate stands at 3.9%. The jobs market is firing on all cylinders. Even your Uncle Ernie can get a job now at a day care center. Click here.
3) But Wage Growth Hits a Nine-Year High at 2.9%. Talk about whistling past the graveyard. Inflation is on the way. Maybe that’s why my bond short is doing so well, as is yours. Click here.
4) Elon Musk Gets High on a podcast and Tesla (TSLA) shares plunge by $30. Bonds hit record lows. Buy the car, not the stock. There are too many black swans circling out there. Click here.
5) Starbucks (SBUX) Finally Moves into Italy, and they’re already getting sued on illegal price cutting. Taking coals to Newcastle. You would think with 25,000 stores worldwide they had enough. Click here.
Published today in the Mad Hedge Global Trading Dispatch:
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON),
(SEPTEMBER 5 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (MU), (MSFT), (LRCX), (GOOGL), (TSLA),
(TBT), (EEM), (PIN), (VXX), (VIX), (JNK), (HYG), (AAPL)