The Five Most Important Things That Happened Today
(and what to do about them)
1) “PATIENCE” is still the order of the day at the Federal Reserve, with its Open Market Committee Meeting ordering no interest rate rise. It was a trifecta for the doves. The free pass for stocks continues. That’s why I covered all my shorts starting from last week. Even a blind squirrel occasionally finds an acorn. Click here.
2) Case Shiller Home Price Index Drops Again, in November, from 5.3% to 5.2% YOY. Las Vegas, Phoenix, and Seattle are still showing the largest gains. It looks like your home-flipping days are over. Click here.
3) Stocks Pop to a 16X Multiple, on a Dow up 500-point day. Given that earnings growth for 2019 is coming down to a 0%-5% range, the market looks a little bit rich to me. Don’t try to pick up too many pennies in front of the steamroller. Click here.
4) Chicago PMI Hits a Two-Year low plunging from 61.40 to 56.7. Why is the bond market saying we are going into recession and the stock market say we aren’t? Warning: the bond market is always right. Click here.
5) Tesla Reports Another Profit, for the second consecutive quarter and the company is about to reach escape velocity. Stocks dive $10. Model 3 production in 2019 to reach 75% of the total output and we can expect a new pickup truck. A second factory in Shanghai will take the “3” to over a half million units a year. That $35,000 Tesla is just over the horizon. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-31 11:22:092019-01-31 11:24:44Mad Hedge Hot Tips for January 31, 2019
Featured Trade:
(MARKET GETS A FREE PASS FROM THE FED),
(SPY), ($INDU), (TLT), (GLD), (FXE), (UUP),
(APPLE SEIZES VICTORY FROM THE JAWS OF DEFEAT),
(AAPL)
When the Oxford English Dictionary considers the Word of the Year for 2019, I bet “PATIENCE” will be on the short list.
That was the noun that Federal Reserve governor Jerome Powell had in mind when describing the central bank's current stance on interest rates.
Not only did Powell say he was patient, he posited that the Fed was currently at a neutral interest rate. The last time he opened on this matter four months ago, the neutral rate was still 50 basis point higher, suggesting that more rate hikes were to come.
What a difference four months makes! The last time Powell spoke, the stock market crashed. Today, he might as well fire a flare gun signaling the beginning of a stampede by investors.
The Dow ($INDU) average at one point gained 500 points. Lower rates for longer term meant that bonds took it on the kisser. And gold (GLD) absolutely loved it as they now have less competition from interest-bearing instruments.
The US dollar (UUP) was taken out to the woodshed and beaten senseless paving the way for a nice pop in the euro (FXE). Even oil (USO) took the cue as cheaper interest rates mean a stronger global economy that will drink more Texas tea.
I believe that the Fed move today will definitely take a retest of the December 24 lows off the table for the time being. Now, if we can only get rid of that damn trade war with China, it will be off to the races for risk in general and stocks specifically.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/Jay-Powell.png289229Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-31 02:07:512019-07-09 04:40:40Market Gets a Free Pass from the Fed
After an almost 40% swan dive, Apple has found solid footing at these levels for the time being. 40% seems to be the magic number. Declines ALWAYS end at 40% with Apple.
About time!
It’s been an erratic last few months for the company that Steve Jobs built and this last earnings report will go a long way to somewhat stabilize the short-term share price.
The miniscule earnings beat telegraphs to investors that the bad news has been sucked out.
That is what Tim Cook wants the investor community to think.
But is he right?
I would argue that the bad news is over for the short-term but could rear its ugly head again later – it all rides on China’s shoulders.
Let’s take a look at the numbers.
Chinese revenue was down 27% YOY locking in $13.17 billion in quarterly revenue compared to $17.96 billion the prior year.
There is no two ways about this – it’s an awful number and a hurtful manifestation of the Chinese economy decelerating.
The unrelenting pressure of the geopolitical trade war has handcuffed Beijing’s drive to deleverage its balance sheet and steer its economy to a more consumption-supportive model.
China is lamentably back to its traditional ways - the old economy - infusing $2.2 trillion into its balance sheet along with cutting the reserve ratio for state banks hoping to incite economic growth.
Positive short-term catalyst but negative long-term consequences.
This is why I urged Apple lovers to stay away from this stock earlier because of the uncertainty of its current strategic position.
It makes no sense to place an indirect on the current Washington administration navigating a China soft landing.
As it stands, most of Apple’s supply chain is in China and moving it out will be done in piecemeal which is happening behind the scenes and will cause massive job loss in China further hurting the Chinese economy.
The ratcheting up of tensions signals the untenable end of American tech supply chains in China and no new foreign investment will pour into China.
Maybe even never.
I wholeheartedly blame CEO of Apple Tim Cook for not foreseeing this development.
That is what he is paid to do.
Then there is the issue of iPhone sales in China.
Chinese citizens aren’t buying iPhones because of three reasons.
The cohort of wealthy Chinese who can afford a $1,000 iPhone might think twice if they want to be seen outside with a product from a country that is becoming adversarial. Apple has incurred hard-to-quantify brand damage to its once pristine brand in a land that once worshipped the company.
The refresh cycle has elongated because Apple manufactures great smartphones and iPhone holders are waiting it out on the sidelines two or even three iterations down the road to upgrade because that is when they can unearth the relative value of the product.
Lastly, local Chinese smartphone markers have greatly enhanced their products because of a function of time and borrowed Western technology. It is now possible to buy a smartphone that offers around 80% of performance and functionality of an iPhone but for less than half the price.
The customers on the fence who once viewed iPhones as a must-buy are now migrating to the local Chinese competitor because they are a relatively good deal.
I can surmise that these three headwinds are just beginning and will become more entrenched over time.
If the trade war becomes worse, the brand damage will accelerate. iPhones are becoming incrementally better which will delay new iPhone upgrades unless something revolutionary comes out that requires customers to upgrade to be a part of the new technology.
And sadly, Chinese competition is catching up quicker than Apple can innovate and that will not stop.
However, the silver lining is that the worst-case scenario won’t happen in the next quarter and the market won’t get wind of this until the second half of the year.
Instead of a meaningful sell-off because of this earnings report, Cook chose to front-run the weakness by reporting the hideous performance at the beginning of January.
Cook knew he needed to come clean with the negative news and the reformulated projections that were re-laid a few weeks ago were the same ones that Apple barely beat by one cent on the bottom line by posting EPS of $4.18 and marginally on the top line by $420 million.
I am in no way saying that this was a great earnings report – it wasn’t.
Apple mainly delivered on the mediocrity that they discussed a few weeks ago lowering the bar to the point where it would be a failure of epic proportions if Apple couldn’t beat significantly revised down earnings.
Then the outlook for the next quarter wasn’t as bad as people thought, but that doesn’t mean it was good.
When you start playing the game of not as bad as the market thought – it is a slippery slope to head down and halfway to the CEO getting sacked down the road.
I mentioned before that the macro headwinds came 2 years too early for Cook and pegging 60% of company revenue to a smartphone which has trended towards mass commoditization is a bad bet.
Cook has been painstakingly slow rewriting Apple as a service company which is his current get-out-of-jail-free card dangling in front of him like a juicy carrot.
iPhone gross margin is now 34.3% which is lower than the other Apple products whose margins are 38%.
Their flagship product isn’t as profitable on a per-unit basis as it once was highlighting the necessity for refreshing the product lines with not just new iterations but game-changing products.
The type of products that Steve Jobs used to mushroom popularity would suffice.
Gross margins will continue to come down as the smartphone market is saturated and customers won’t buy iPhones now unless they receive a drastic price reduction.
The result is that Apple no longer publishes iPhone unit sales to conceal the worst number for their most important and volume-heavy product.
A little too late if you tell me and irresponsible to investor transparency if you ask me.
Apple Pay, Apple Music, and iCloud storage eclipsed $10.9 billion demonstrating a 19% YOY increase.
This shows that this company still has strengths, but don’t forget that services are still less than 15% of total revenue even though they are the fastest growth part of their portfolio.
Cook isn’t doing enough to supercharge the content and services at Apple.
The top line number was $84.3 billion, a 5% YOY decline in revenue – a YOY decline hasn’t happened in 18 years and this is deeply troublesome.
Let me explain why Cook is the center of the problem.
The underlying issue is Cook doesn’t know what product should be next for Apple.
Apple dabbled with the Apple TV which didn’t pan out.
Then the autonomous vehicle unit just closed down sacking 200 employees.
And the content side of it hasn’t been developed fast enough relative to the slowing down of iPhone sales which is why you can blame Cook for being reactive instead of proactive.
It’s not like he can claim that his head was in the sand and couldn’t take note of what Netflix was doing and had gotten into that original content game sooner.
The hesitation is exactly what worries me with Cook. Cook is a great operations guy and can take an existing product, beef up margins, shave down expenses, streamline execution and boost top and bottom line profits.
Cook is being painfully exposed now that he is out of his comfort zone and must aggressively move in a direction that doesn’t have a red carpet laid out for him.
Even though the pre-earnings red flag raised many questions, Cook only satisfied these red flags on a short-term basis and Apple still needs to reconfigure its product roadmap for the long term.
If Cook plans to milk more out of the iPhone story, Apple becomes a sell the rallies stock, but the market will give the benefit of the doubt to Apple for a quarter or so.
The 800-pound gorilla in the room is the Chinese economy which could go into a hard landing if the stimulus fails to deliver economic respite or if the trade war tensions are exacerbated.
At the bare minimum, the waterfall of downgrades should be over for the time being, but this will come to the fore in a quarter or so when Apple will need to shine light on its plans moving forward.
I wouldn’t bet the ranch on Cook being innovative.
It looks like Apple will start to trade in a range.
It’s hard to believe any bad news superseding what came out at the beginning of this month in the short-term, but at the same time, there are no idiosyncratic catalysts to cause this stock to bullishly break out.
We are at an inflection point in Cook’s career and he is finding out that it's not as easy to be Apple as it used to, and mammoth decisions are on the horizon that must be addressed or possibly become the next IBM.
If you ask me, I’ve been calling on Apple to replace Cook for a while with Jack Dorsey as the signal caller, I still believe this is the only way to stay in the heavyweight division of tech titans five years from now.
Such is the competitive nature of the tech landscape these days.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/iPhones.png593675Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-31 02:06:082019-07-09 04:40:50Apple Seizes Victory from the Jaws of Defeat
The Five Most Important Things That Happened Today
(and what to do about them)
1) Apple Slightly Beats Expectations, with revenues at $84.31 billion versus $83.97 billion expected, and earnings at $4.18 per share versus $4.17 expected. Guidance going forward is very cautious of a slowing China. The stock was up twelve bucks at the peak. Good thing I saw the ambush coming and covered my short two days ago. A penny beat is the most managed earnings I have ever seen. To warn about earnings and then surprise to the upside is classic Tim Cook. Click here.
2) Consumer Confidence Falls Off a Cliff, to an 18-month low, a key index dropping from 126.6 in December to 120.2 in January. Getting the bill from you maxed out credit cards last month didn’t help. Nor did the government shutdown and the stock market crash. Click here.
3) Gold Hits an 8 Month High, as nervous investors hoover up a downside hedge. Russian and Chinese central bank buying helps too. Click here.
4) AMD Soars 10% on its Earnings Beat, and the outlook is rosy, says the CEO Lisa Su. Apparently, not all chip stocks are alike. Click here.
5) December Pending Home Sales Crater, down 2.2% in December and 9.8% YOY. Despite the dramatically lower interest rates buyers fled the crashing stock market. Click here.
Published today in the Mad HedgeGlobal Trading Dispatch and Mad Hedge Technology Letter:
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-30 11:02:392019-01-30 11:02:39Mad Hedge Hot Tips for January 30, 2019
As much as I malign Facebook (FB) CEO and Founder Mark Zuckerberg, the risk-reward for Facebook’s earnings that come out after Wednesday’s close favor the upside.
Let me explain.
I have been bearish on this name for quite a while and I have been rewarded in spades.
From the Cambridge Analytica leak to firing the heads of Instagram and WhatsApp, last year was a year to forget and the stock was crushed.
This time, it’s a little different.
I believe the saturated business model has largely been priced in to the stock and the company is transitioning to a more lucrative side of the business with other levers they can pull.
Facebook can’t move mountains to raise the needle in the number of users in the western developed world.
The rich western world is Facebook’s profit engine with average revenue per user remarkably higher than its emerging user audience.
The company will change tact and seek to increase average revenue per user because of decelerating usership.
Emerging markets are the last bastion of growth for its user base, but unfortunately, this source of new users cannot be lucratively monetized like its staunch North America and Western European cash cows.
The lion's share of new users are from countries including India, Indonesia and Philippines where advertisers focus more on TV, print and physical advertising.
Expect Facebook to announce slowing user growth in the low single digits.
This likely won’t be a surprise to markets along with more rumblings about the average age of user increasing as Generation Z flees the platform.
The silver lining in this development is that Generation Z is fleeing Facebook and migrating to Instagram which is also owned by Facebook and a hyper-growth engine.
Even with the younger generation deleting Facebook in droves, Facebook still has a base of over 2 billion and every one of these customers use one of Facebook’s four services every day.
That is partly why it is attractive to digital advertisers and Facebook culls 98% of total revenue from ads.
If you forgot about last quarters earnings, Facebook handily beat EPS forecasts by 30 cents and barely missed on the top line, and that was in the face of disturbing ructions of a full-on regulation tech lash.
The first stage of negative regulation and the fallout have effectively been absorbed by the market and the second stage isn’t visible on the horizon as of today.
That day will eventually come but not before they come out with earnings later today, and not where near-term guidance will be materially affected.
If you read Mark Zuckerberg’s New York Times op-ed, he still believes that any road bump can be parsed over with marketing gibberish, and I would agree that the next stage of regulation that could damage the company is far away enough that this stall tactic will work for this particular earnings report.
However, this myopic and dangerous strategy must be managed quarter to quarter. There will be a time when the market needs to hear how Facebook will actually fix the model if a new wave of tech fury erupts.
The firm is safe now as the general trend for more robust regulation has started muted at the beginning of 2019 with congress and the administration busy with a closed government and political infighting bordering insanity.
This type of national news jumps to the forefront and pushes back the possible timeline for enforced regulation especially when 800,000 government workers were broadsided and couldn’t put food on the table or pay their rent.
To follow up on the political front, management is sure to take last year’s midterm election success and milk it for all its worth.
There were no disastrous scandals, recounts, or platform manipulation that could potentially do harm to the stock.
Facebook will tout this as a sign that its controls are starting to reap dividends and concrete evidence that they have shaped up since the Russian interference compromised the business model during last presidential election.
In late 2018, Facebook forecasted expenses to grow 40%-50% in 2019.
The headline expense number was set astronomically high in order for management to easily beat forecasts and announce that today.
Since management has categorized many material problems as marketing fixes, they have normalized doing the bare minimum as a stopgap measure masquerading as a real, full blown fix.
The one insight that keeps slamming me straight in the face like a gale force wind is that Zuckerberg likes his money which means he needs the stock to go up.
That would be the pitiful reason he offers these half-baked excuses as legitimate fixes because he understands that comprehensive solutions would be too costly damaging future earnings.
He also needs the stock to go up because many of the new faces at Facebook are compensated by stock because of a lack of cash on hand.
What is a meaningful catalyst to take Facebook higher?
The firings of the heads of WhatsApp and Instagram paved the way for the transition to 2019 where Facebook will monetize these other two services as well as integrating the back-end with Facebook.
This is viewed as the holy grail of Facebook growth and Zuckerberg incessantly refuted this would ever happen.
Well, the cat is out of the bag now.
In integrating the back-end of these three services, Facebook will extract a deeper insight into the behavior of their usership with a 360 degree view of their daily habits.
This deeper understanding of behavior will allow them to harvest the data in a way that is more valuable to digital ad buyers.
Facebook plans to compensate the lack of user growth for higher quality ads, and in turn they will be able to charge the ad buyers more per ad.
This strategy is a high risk, high reward maneuver because the company will intrude more into the personal data of their users than ever before.
On a business level, Zuckerberg has few options left up his sleeve and is predictably migrating towards the low hanging fruit as well as his best option today.
There is not much juice he can squeeze out of dinosaur Facebook anymore and margins will come down from now on.
However, WhatsApp and Instagram are fertile pastures for Zuck to wield his ad-hawking expertise.
Readers might forget that there are no ads on WhatsApp yet and its virgin provenance has been left largely unchanged from the beginning offering Zuck a golden project to mold his paws on.
If the CEO of Facebook goes into details about Facebook’s plan to ramp up these two social media platforms, the stock has a good chance to react positively.
The bar has been set quite low and Facebook has targeted this earnings report as an inflection point in the company’s history as they begin to pull alternative levers available to them.
This is a short-term prognosis in an otherwise murky future for the company.
Challenges are endless and part of the ceaseless issues involves Facebook not adding any real value as a technology platform or not possessing any ground-breaking technology or proprietary software.
Facebook is the used car salesman of the tech world and they are doing everything they can to stay relevant.
If Facebook does sell off after the WhatsApp and Instagram integration announcement, it is safe to deduce that Facebook is out of bullets and the stock becomes a sell on the rallies company until they can do something to stem the blood flow.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/Mark-Zuckerberg.png608697Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-30 08:06:162019-07-09 04:52:37Is the Bottom in for Facebook?
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/Sheryl-Sandberg.png310308Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-30 08:05:052019-07-09 04:52:46January 30, 2019 - Quote of the Day
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