Global Market Comments
July 27, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, AUGUST 3, 2018,
AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(STOCKS TO BUY ON THE OUTBREAK OF TRADE PEACE),
(QQQ), (SPY), (SOYB), (CORN), (WEAT), (CAT),
(DE), (BA), (QCOM), (MU), (LRCX), (CRUS),
(ORIENT EXPRESS PART II, or REPORT FROM VENICE)
So, how will the trade war end? It could be the crucial trading call of 2018.
"That which can't continue, won't," I paraphrase the noted economist Herbert Stein. I think that logic neatly applies to our global trade wars today.
In 1970, some 25% of world GDP was accounted for by international trade. Today it is 52%. Germany has been the powerhouse, with trade growing from 25% to 80%, largely through exploding auto exports. Trade growth in the U.K. has been pitiful as the old colonial ties loosened, improving only from 40% of GDP to 52%.
In the U.S., trade has grown from 10% to 25% of GDP during this time. It is far lower than the rest of the G7 nations because of the massive size of its domestic economy.
Still, placing restraints on 25% of U.S. GDP, or about $5 trillion, is quite a big hit. Think an imminent recession, quite possible a severe one. The $13 billion in subsidies offered the agriculture sector is but a drop in the bucket. It would be like killing off the goose that laid the golden egg.
Trump has a weak hand, which is growing weaker by the day. It is just a matter of time before he folds. Not to do so would entirely wipe out the benefits of the December tax package, yet still leave the U.S. government with $2 trillion in new debt. It is a perfect money destruction machine.
My bet is that Trump will claim victory at some point soon, regardless of what transpires on the negotiation front. Take the trade war away, and stocks will immediately jump 10%. That's what the stock market thinks, with NASDAQ (QQQ) at an all-time high, and the S&P 500 (SPY) just short of one. Stocks are trading over the medium term as if Donald Trump doesn't exist.
Which stocks should you buy when trade peace breaks out? Buy those that have suffered the most. The ags have to be at the top of your list, such as Soybeans (SOYB), Corn (CORN), and Wheat (WEAT), the worst hit. The old industrials such as Caterpillar (CAT), John Deere (DE), and Boeing (BA) also have to be a priority.
In the technology area you have to rotate out of the FANGs and into chip stocks, the worst performers of the sector this year. Perhaps this is what the market is shouting at us with the horrific one-day decline in Facebook (FB) yesterday. China relies on the U.S. for 80% of its chips and all of its high-end graphics cards.
China's canceling of the QUALCOM (QCOM) takeover of its NXP Semiconductors shows to what extent it is willing to retaliate in the tech area. Chip stocks to buy for the rebound should include Micron Technology (MU), Cirrus Logic (CRUS), and Lam Research (LRCX).
Even if the trade war ends tomorrow, business conditions will never be the same. Confidence in American reliability will never completely recover. Sure, Trump will be gone in 2 1/2 years. But what if he is replaced by someone worse? Trading with the United States now incurs a level of political risk not seen since the War of 1812, when Washington burned.
But no trade war is certainly better than a trade war if you are a trader or investor.
Telling the Captain How to Steer the Ship
If you ever need someone to owe you a big favor, make sure it is the world's best hotel.
That is what I discovered when I checked into the legendary Cipriani Hotel in Venice, Italy. I had booked its cheapest room at $1,500 a day. Due to a screwup on the reservations, I learned to my great distress that I could stay only one night.
The good news was that the hotel graciously offered me a free upgrade to its presidential suite, a two-bedroom palace stuffed with 18th century antiques, exquisite Murano glass chandeliers, and its own private pier and driver.
All of this was a bargain for $12,000 a day. Would you care for a $1,000 complimentary dinner for two? And, oh, seniore, could we please cover the cost of the rest of your entire stay in Venice at the Hotel Danieli, a 16th century palace that was the city's other trophy hotel? Total value of these freebies: $18,000.
Thank you Orient Express!
Thus, my stay in Venice was off to a spectacular and serendipitous start. They say, "See Venice, and die." That's because so many drop dead when they get the bill.
Feel like a continental breakfast for two with cappuccino for $100? It was all worth it, as breakfast on the roof of the Danieli was one of those once-in-a-lifetime, bucket-list-type experiences.
Watercraft churned by in the hundreds, including ancient gondolas, wheezing, smoky old vaporettos, water taxis, inflatable dinghies, and even sailboats. I fought the seagulls for the butter patties, which if not eaten immediately, melted in the heat.
Squeezing my way through the crowded alleyways of this enchanted Renaissance city, I caught a snapshot of the global economy.
The only Americans I saw were either young hedge fund traders wearing Rolex watches, or technology moguls cashing in this year's bubblicious prices. The rest were clearly scared off by the price tag.
The Japanese were still there in force. But the groups included many single spinster women in their 30s and 40s escorting their parents, unable to get married in an economy that has shown almost no growth in two decades.
They were joined by large tour groups from the up-and-coming economies of China and Brazil, their leaders barking out orders and leading the charge with large umbrellas or flags.
The super yachts of the Russian oligarchs lined the waterfront, conspicuous with their obscure Caribbean flags of convenience.
Extended Arab families that included two, three, or even four wives, and uncountable children in designer togs could be spotted in the best restaurants, the women laboring in their burkas in the 95-degree humid heat. It seems that oil even at $75 a barrel will cover every bill and excuse any excess.
I have been coming here since 1968, and am never disappointed. I made my ritual stop by Harry's Bar for a champagne Bellini, and strolled past the American Express office where I used to pick up my mail during my wild and reckless, pre-Internet youth.
I made a pilgrimage to Quadracci's on the Piazza San Marco, where my grandfather used to sip espresso with another young ambulance driver named Ernest Hemingway during WWI. Family legend has it that Hemingway modeled his Italian driver friend on grandpa, who in the book Farewell to Arms gets killed.
That night, I had the concierge send a speedboat around to my room to take me across the lagoon to the Casino at the Lido. An Arab at my blackjack table was losing $50,000 a hand and sending out hugely negative vibes, so I moved.
I just wanted to let you know where the money for your $4 a gallon gasoline was going. As I was playing merely to see who was there, I gave my winnings to the dealer, who gave me a big grazie. It seems that Italians are lousy tippers.
On my way back, I stood in my powerboat alone, holding on to the cabin and racing across the water at 40 knots in the darkness, wearing my white dinner jacket and bow tie, the wind blowing through my hair, thinking life is good and feeling every inch the James Bond.
I better come up with some new trades to pay for all of this. I mentally prepared myself for my strategy luncheon the next week in Amsterdam.
To be continued.
"If you can't make yourself loved, make yourself feared," said Mayer Amschel Rothschild, founder of the banking dynasty.
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
July 26, 2018
Fiat Lux
AMAZON SPECIAL REPORT
Featured Trade:
(SO WHERE DID THOSE AMAZON EARNINGS REALLY COME FROM
AND WHERE ARE THEY GOING?),
(AMZN), (WMT)
Mad Hedge Technology Letter
July 26, 2018
Fiat Lux
Featured Trade:
(THE TRADE WAR'S COLLATERAL DAMAGE),
(SWKS), (ACIA), (CRUS), (XLNX), (ROKU), (SQ)
Amazon earnings come out after the close today so it's a good time to bone up on the history of the online retail giant. Forewarned is to be forearmed.
Is to time to cash in on the huge profits you have already attained or is it time to load the boat some more?
Jeff Bezos, born Jeff Jorgensen, is the son of an itinerant alcoholic circus clown and a low-level secretary in Albuquerque, New Mexico. When he was three, his father abandoned the family. His mother remarried a Cuban refugee, Miguel Bezos, who eventually became a chemical engineer for Exxon.
I have known Jeff Bezos for so long he had hair when we first met in the 1980s. Not much though, even in those early days. He was a quantitative researcher in the bond department at Morgan Stanley, and I was the head of international trading.
Bezos was then recruited by the cutting-edge quantitative hedge fund, D.E. Shaw, which was making fortunes at the time, but nobody knew how. When I heard in 1994 that he left his certain success there to start an online bookstore, I thought he'd suffered a nervous breakdown, common in our industry.
Bezos incorporated his company in Washington state later that year, initially calling it "Cadabra" and then "Relentess.com." He finally chose "Amazon" as the first interesting word that appeared in the dictionary, suggesting a river of endless supply. When I learned that Bezos would call his start-up "Amazon," I thought he'd gone completely nuts.
Bezos funded his start-up with a $300,000 investment from his parents who he promised stood a 50% chance of losing their entire investment. But then his parents had already spent a lifetime running Bezos through a series of programs for gifted children, so they had the necessary confidence.
It was a classic garage start-up with three employees based in scenic Bellevue, Washington. The hours were long with all of the initial effort going into programming the initial site. To save money, Bezos bought second-hand pine doors, which stood in for desks.
Bezos initially considered 20 different industries to disrupt, including CDs and computer software. He quickly concluded that books were the ripest for disruption, as they were cheap, globally traded, and offered millions of titles.
When Amazon.com was finally launched in 1995, the day was spent fixing software bugs on the site, and the night wrapping and shipping the 50 or so orders a day. Growth was hyperbolic from the get go, with sales reaching $20,000 a week by the end of the second month.
An early problem was obtaining supplies of books when wholesalers refused to offer him credit or deliver books on time. Eventually he would ask suppliers to keep a copy of every book in existence at their own expense, which could ship within 24 hours.
Venture capital rounds followed, eventually raising $200 million. Early participants all became billionaires, gaining returns of 10,000-fold or more, including his trusting parents.
Bezos put the money to work, launching into a hiring binge of epic proportions. "Send us your freaks," Bezos told the recruiting agencies, looking for the tattooed and the heavily pierced who were willing to work in shipping late at night for low wages. Keeping costs rock bottom was always an essential part of the Amazon formula.
Bezos used his new capital to raid Wal-Mart (WMT) for its senior distribution staff, for which it was later sued.
Amazon rode on the coattails of the Dotcom Boom to go public on NASDAQ on May 15, 1997 at $18 a share. The shares quickly rocketed to an astonishing $105, and in 1999 Jeff Bezos became Time magazine's "Man of the Year."
Unfortunately, the company committed many of the mistakes common to inexperienced managements with too much cash on their hands. It blew $200 million on acquisitions that, for the most part, failed. Those include such losers as Pets.com and Drugstore.com. But Bezos's philosophy has always been to try everything and fail them quickly, thus enabling Amazon to evolve 100 times faster than any other.
Amazon went into the Dotcom crash with tons of money on its hands, thus enabling it to survive the long funding drought that followed. Thousands of other competitors failed. Amazon shares plunged to $5.
But the company kept on making money. Sales soared by 50% a month, eventually topping $1 billion by 2001. The media noticed Wall Street took note. The company moved from the garage to a warehouse to a decrepit office building in downtown Seattle.
Amazon moved beyond books to compact disc sales in 1999. Electronics and toys followed. At its New York toy announcement Bezos realized that the company actually had no toys on hand. So, he ordered an employee to max out his credit card cleaning out the local Hammacher Schlemmer just to obtain some convincing props.
A pattern emerged. As Bezos entered a new industry he originally offered to run the online commerce for the leading firm. This happened with Circuit City, Borders, and Toys "R" Us. The firms then offered to take over Amazon, but Bezos wasn't selling.
In the end Amazon came to dominate every field it entered. Please note that all three of the abovementioned firms no longer exist, thanks to extreme price competition from Amazon.
Amazon had a great subsidy in the early years as it did not charge state sales tax. As of 2011, it only charged sales tax in five states. That game is now over, with Amazon now collecting sales taxes in all 45 states that have them.
Amazon Web Services originally started out to manage the firm's own website. It has since grown into a major profit center, with $17.4 billion in net revenues in 2017. Full disclosure: Mad Hedge Fund Trader is a customer.
Amazon entered the hardware business with the launch of its e-reader Kindle in 2007, which sold $5 billion worth in its first year. The Amazon Echo smart speaker followed in 2015 and boasts 71.9% market share. This is despite news stories that it records family conversations and randomly laughs.
Amazon Studios started in 2010, run by a former Disney executive, pumping out a series of high-grade film productions. In 2017 it became the first streaming studio to win an Oscar with Manchester by the Sea with Jeff Bezos visibly in the audience at the Hollywood awards ceremony.
Its acquisitions policy also became much more astute, picking up audio book company Audible.com, shoe seller Zappos, Whole Foods, and most recently PillPack. Since its inception, Amazon has purchased more than 86 outside companies.
Sometimes, Amazon's acquisition tactics are so predatory they would make John D. Rockefeller blush. It decided to get into the discount diaper business in 2010, and offered to buy Diapers.com, which was doing business under the name of "Quidsi." The company refused, so Amazon began offering its own diapers for sale 30% cheaper for a loss. Diapers.com was driven to the wall and caved, selling out for $545 million. Diaper prices then popped back up to their original level.
Welcome to online commerce.
At the end of 2018, Amazon boasted some 306,000 employees worldwide. In fact, it has been the largest single job creator in the United States for the past decade. Also, this year it disclosed the number of Amazon Prime members at 100 million, then raised the price from $80 to $100, thus creating an instant $2 billion in profit.
The company's ability to instantly create profit like this is breathtaking. And this will make you cry. In 2016, Amazon made $2.4 billion from Amazon gift cards left unredeemed!
In 2017, Amazon net revenues totaled an unbelievable $177.87 billion. It is currently capturing about 50% of all new online sales.
So, what's on the menu for Amazon? There is a lot of new ground to pioneer.
1) Health Care is the big one, accounting for $3 trillion, or 17% of U.S. GDP, but where Amazon has just scratched the surface. Its recent $1 billion purchase of PillPack signals a new focus on the area. Who knows? The hyper-competition Bezos always brings to a new market would solve the American health care crisis, which is largely cost driven. Bezos can oust middle men like no one else.
2) Food is the great untouched market for online commerce, which accounts for 20% of total U.S. retail spending, but sees only 2% take place online. Essentially this is a distribution problem, and you have to accomplish this within the prevailing subterranean 1% profit margins in the industry. Books don't need to be frozen or shipped fresh. Wal-Mart (WMT) will be target No. 1, which currently gets 56% of its sales from groceries. Amazon took a leap up the learnings curve with its $13.7 billion purchase of Whole Foods (WFC) in 2017. What will follow will be interesting.
3) Banking is another ripe area for "Amazonification," where excessive fees are rampant. It would be easy for the company to accelerate the process through buying a major bank that already had licenses in all 50 states. Amazon is already working the credit card angle.
4) Overnight Delivery is a natural, as Amazon is already the largest shipper in the U.S., sending out more than 1 million packages a day. The company has a nascent effort here, already acquiring several aircraft to cover its most heavily trafficked routes. Expect FedEx (FDX), UPS (UPS), DHL, and the United States Post Office to get severely disrupted.
5) Amazon is about to surpass Wal-Mart this year as the largest clothing retailer. The company has already launched 76 private labels, with half of them in the fashion area, such as Clifton Heritage (color and printed shirts), Buttoned Down (100% cotton shirts) and Goodthreads (casual shirts) as well as subscription services for all of the above.
6) Furniture is currently the fastest growing category at Amazon. Customers can use an Amazon tool to design virtual rooms to see where new items and colors will fit best.
7) Event Ticketing firms like StubHub and Ticketmaster are among the most despised companies in the U.S., so they are great disruption candidates. Amazon has already started in the U.K., and a takeover of one of the above would ease its entry into the U.S.
If only SOME of these new business ventures succeed, they have the potential to DOUBLE Amazon's shares from current levels, taking its market capitalization up to $1.8 trillion. Amazon will easily win the race to become the first $1 trillion company. Perhaps this explains why institutional investors continue to pour into the shares, despite being up a torrid 83% from the February lows.
Whatever happened to Bezos's real father, Ted Jorgensen? He was discovered by an enterprising journalist in 2012 running a bicycle shop in Glendale, Arizona. He had long ago sobered up and remarried. He had no idea who Jeff Bezos was. Ted Jorgensen died in 2015. Bezos never took the time to meet him. Too busy running Amazon, I guess. Worth $160 billion, Bezos is now the richest man in the world.
From a Garage to This
As the trade ruckus rumbles on for the foreseeable future, there are some places to deploy cash and some places to avoid like the zika virus.
The one area of tech to avoid that is clearer than daylight is the small cap chips companies.
Like a fish out of water, you should not feel comfortable holding shares in this type of equity amid the backdrop of an unresolved trade skirmish.
Although the Mandarins ironically need our chips, the uncertainty permeating around small chip firms means it's not time to hold let alone initiate new positions.
Investors still don't know how this standoff with shake out.
Until, there is more clarity going forward, give way to the next guy who can take the heavy loss.
Keep the powder dry for better times.
The long-term demand picture is healthy with IoT, cloud, and software companies never being thirstier for chips.
Short term is a different story with many of these smaller chip companies subscribing to grotesque charts that will make your jaw drop.
Take Skyworks Solutions, Inc. (SWKS) whose shares have spent the majority of 2018 trending lower and are stuck in purgatory.
(SWKS) produces semiconductors deployed in radio frequency (RF) and mobile systems.
This stock has been tainted by the horrid reality that it generates 25% to 30% of revenue from China.
If you have been living in a cave for the past eight months, technology is the battleground for global supremacy pitting two of the leading technological heavyweights in the world against each other in a fiercely contested, drawn-out conflict.
Any American listed chip company doing at least 20% of revenue in China has the same chart trajectory and that is not up.
Adding insult to injury, (SWKS) generates 35% to 40% of its total revenue from Apple.
As we approach every earnings season, the story rewinds and plays again to loud applause.
A slew of analysts appears on air condemning Apple promulgating lower iPhone sales due to surveys taken across various key suppliers giving them a snapshot into production numbers.
Each time, the analysts are proved wrong. However, the avalanche of downgrades that ensues knocks the stuffing out of the small chip companies dipping viciously, at times more than 10% or more on the headline.
One of the larger Chinese contracts that was signed by (SWKS) was with ZTE. Yes, that ZTE, the one the U.S. administration temporarily put out of business for selling telecommunication equipment to North Korea and Iran.
That was the nail in the coffin.
According to the (SKWS) official website, it has an ongoing, expanding relationship with ZTE and its chips would be "powering data cards and USB modems" in ZTE-manufactured next-generation tablets.
Luckily, the American government reversed its initial decision restoring operations to ZTE.
That does not mean it is out of the woods yet as lingering risks still overhang over this company.
This revelation underscores the massive contract risk for companies that unlike behemoths such as Micron, are desperately reliant on just a handful of contracts to propagate short-term revenue.
Effectively, the U.S. administration views American chip companies as collateral damage to the bigger picture.
The only reason the ZTE ban was lifted was because it was a prerequisite to restart talks between both sides.
If the ban was upheld, 75,000 Chinese workers would have needed to polish the dust off their resumes to start a fresh job search.
The inability to sell components to service the Chinese consumer will strike where it hurts most: the bottom line.
Chip producers did $1.5 billion in sales with ZTE in 2017. That business is in a precarious situation when a tweet can just wipe out those contracts in one fell swoop.
Acacia Communications, Inc. (ACIA) churns out high-speed coherent interconnect products.
The stock was beaten down then beaten some more in 2018.
(ACIA) revealed 30% of its $385.2 million revenue derived from one contract with guess who...ZTE.
On word of ZTE ban, (ACIA) plummeted from $40 to $27.50 in one trading day.
The disappearance of a contract this vital to survival is tough for a small business to handle even if temporary.
Layoffs and a squeezed financial situation apply unrelenting pressure on management to find an elixir.
Cirrus Logic Inc. (CRUS) pumping out a mix of analog, mixed-signal, and audio DSP integrated circuits (ICs) was trading more than $62 just a year ago.
Fast forward to today and its shares are at a measly $39.
To say Cirrus Logic's eggs are in one basket is an understatement.
(CRUS) procures 80% of revenue from Apple.
It's all hunky-dory to develop a close relationship with Apple, but in light of this unpredictable economic climate, shares have been hit hard and there is no end in sight.
(CRUS) even won a contract to help produce Apple's noise canceling and water-resistant AirPods, but that does not do anything to change the narrative.
The vultures are circling around this name and it was time to abort a long time ago.
Xilinx, Inc. (XLNX) is another small chip company and the first to create the first fabless manufacturing model headquartered in San Jose, California.
This company, founded in 1984, procures around 35% of revenue from China
The trade headwinds have set this stock in the crosshairs, being the victim of frequent 5% drops and two 10% slides in 2018.
It is a miracle this stock is slightly in the green this year, and (XLNX) is one of the lucky ones.
Skim through the rest of small cap chips stocks and the charts look the same. Dreadful with massive rally busting sell-offs.
The extreme volatility in and of itself is a sensible reason to steer clear of these names.
The headline risks that splash across the morning news spreads are a daily reminder that chip stocks, big and small, aren't out of the woods yet.
The Johnny-come-latelies must expose themselves to higher quality, unique assets which possess little or no China exposure.
For the experts, trade the volatility at your peril. But if volatility is what you want with scarcity of value, leg into Roku (ROKU) or Square (SQ) on moderate sell-off days.
________________________________________________________________________________________________
Quote of the Day
"Technological progress is like an ax in the hands of a pathological criminal," said German-born theoretical physicist Albert Einstein.
"Life is too short to hang out with people who aren't resourceful," said Jeff Bezos, the founder of Amazon.
