Mad Hedge Technology Letter
January 14, 2019
Fiat Lux
Featured Trade:
(THE TECH DARLING OF 2019),
(TWLO), (MSFT)
Winter 2018 was a time to remember as American tech shares were caught up in a perfect storm of a global growth scares, interest rate gyrations, and a political tug of war that sees no end in sight.
All of this made investors run for the hills after a huge run-up of tech shares since the February correction in 2018.
Even after all the chaos, there is one tech stock that has muscled out the noise and is hovering at all-time highs.
Coincidently, this is a name that I recommended last year as a strong 2019 play and I would like to reaffirm my prognosis by doubling down on cloud communications company Twilio.
Twilio will be a darling of 2019 because it seeks to upgrade a whole swath of communications in legacy companies that are scurrying to compete with the rest who have forged ahead.
The start of 2019 has been a positive omen for Twilio shares, and are almost 10% higher in this short span of time.
It’s discernable that it is not only me who believes in this company and naysayers are few and far between.
Twilio doesn’t get as much PR as it should because making sure the back-end communication channels are executing at optimum levels is not exactly a sexy part of tech with shiny smartphones and wearable gadgets.
This company produces software and are good at what they do.
Many of you might not have even heard of them but I am sure you have heard of companies such as Uber, Lyft, and Airbnb.
Why do I mention these three private tech companies that are on the verge of going public this year?
Because this trio of unicorns is all powered by Twilio’s communication technology that is best of breed in their genre of cloud software.
More specifically, Twilio is a platform as a service (PaaS) firm offering programmatic phone call functions, can automate sending and receiving text messages, and performs other communication functions using its web service APIs.
When your shaggy-haired Uber driver calls asking you to reveal yourself out of a concrete apartment block or your lavish gated community, this is all facilitated by Twilio’s technology.
At the 2018 Twilio Signal Conference in San Francisco, Twilio indicated that its latest “call center in a box” product called Flex was up and running after announcing in March last year.
Prior to Twilio’s roll-out, this type of call center functionality was only reserved for the Fortune 500 companies that could afford expensive software to serve its minions of customers.
The small guy was left out in the cold as usual.
Twilio has reshaped the call center and, at $1 per hour or $150 per month, has made itself a gamechanger for SMEs who don’t have the manpower or capital to fund exorbitant back-end operations.
Twilio is really going after anyone with a light or bulky-shaped wallet as you see from their all-star lineup of customers. U-Haul, real estate website Trulia, and data analytic firms Scorpion and Centerfield are just a few of their customers proving the incredible flexibility and inclusive nature of the software.
It’s not a shock that this stock has gone ballistic in 2018 surging over 200% and I must admit investors need to wait for this molten hot stock to cool down.
But how can you blame a company that habitually beats any expectations by investors because of its super growth model and rapid broad-based adoption?
From the fourth quarter of last year, revenue accelerated to 48% YOY and Twilio followed that up with a blistering 54% YOY quarter.
Then they pulled a shocker guiding down only expecting 35% to 37% growth but dismantled any whiff of jangling investors' nerves by posting another quarterly growth rate of 54%.
If you average out the three-year sales growth rate, few can topple the 57% Twilio has registered.
Performance has been fantastic, to say the least, and Flex could be the product that widens their industry lead and fortifies the moat around them.
Airbnb, Uber, and Lyft will avoid tinkering with the back end of their operations before their 2019 IPOs boding well for Twilio who are on a hot streak scoring a series of big contracts.
And as their IPO dates creep closer, I firmly believe that the quiet story of Twilio will jump to the fore.
There is only so long this brilliant company can be kept under wraps.
If you take a long-term view of companies, this cloud company will be investor’s ticket to early retirement.
Even though Twilio has failed to become profitable, this year bodes well with EPS growth expected to be over 10%.
This year will be the precursor to 2020 when Twilio really invigorates earnings capability with analysts forecasting over 48% EPS growth in 2020.
Sometimes cloud companies must move mountains and absorb years of losses to finally breach the profitability marker, that time is about to come for Twilio and along with maintaining its riveting growth, the business model will become more sustainable with a vast improvement in cash flow.
Although Twilio’s competitive advantage is not as large as Microsoft (MSFT), this company has the same type of momentum going into 2019.
I believe many institutional investors have yet to hear this name echo around investment offices, and if any tech stock is going to be the darling of 2019, it will be Twilio.
I expect Twilio shares to shortly eclipse the $100 mark and maintain that level with an infusion of zeal that mimics Microsoft’s share price.
Notice that through hell and high water, any massive sell-off that crushes Microsoft swan diving below $100, shares find itself above $100 again in a jiffy.
I expect Twilio to exude similar characteristics, albeit with more volatility.
Twilio has the ability to rise 10% or even 15% on any given day on good news.
Being at all-time highs again only illustrates the attractiveness of the name.
In general, this should really be a software-as-a-service (SaaS) year for investors as the migration to these services picks up speed.
Any meaningful dip that can be attributed to outside forces should be bought because there are no fundamental problems with Twilio.
Don’t chase the stock here because it’s up almost 300% in the past 365 days - wait for it to fall into your wheelhouse.
To add the cherry on top, this company is far away from the geopolitical trade winds.
And even though fundamental differences have yet to be hashed out, at least it debugs one potential headwind to the fundamental story.
Twilio should outperform this year relative to the large tech stocks, it’s up to you if you want to ride on the coattails of this story or try your luck on less qualified names.
And not to toot my own horn, but this stock is already up almost 30% since I urged readers to pile into it.
I am strongly bullish Twilio.
“I think the most diverse group will produce the best product; I firmly believe that.” – Said CEO of Apple Tim Cook
Mad Hedge Hot Tips
January 11, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) The Government Shutdown Hits 3 Weeks. If it continues, you can kiss this market rally goodbye. We are losing 5-10 basis point of GDP growth per day, and JP Morgan has already cut Q1 growth by 25 basis points. Click here.
2) 2019 Earnings Forecasts Just Got Chopped, from 10% growth to 6%. Will they get cut more? Your retirement portfolio cares. Click here.
3) Junk-Bond Issuance Returns, after a 40-day absence. It had shut down during the stock market crash. Maybe the bull market really is resuming again? Click here.
4) Home Mortgage Rates Hit a 9-Month Low, with the conventional 30-year fixed rate loan now wholesaling at 4.4%. Will it be enough to reignite the real estate market? Buy Lennar (LEN). Click here.
5) Will China’s Top Trade Negotiator Visit the US This Month? It could be worth another 1,000 points in the Dow. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WHY THE MARKET CRASHED IN DECEMBER),
(SPY), ($INDU), (VIX)
(THE GOVERNMENT’S WAR ON MONEY),
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to the 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
this post is a test for Michelle and is marked as administrator access only - do not uncheck the box "Hide Completely" on right -->
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
January 11, 2019
Fiat Lux
Featured Trade:
(WHY THE MARKET CRASHED IN DECEMBER),
(SPY), ($INDU), (VIX)
(THE GOVERNMENT’S WAR ON MONEY),
(TESTIMONIAL)
Were you horrified by the market action in December? The next one could get much worse.
We are all used to market corrections. Live long enough and you will endure hundreds of them.
But December? That was a real first class crash, a four times a century event. And to see this occur in the face of solid economic data made it totally unexpected by all. The only analysts predicting a collapse like this one are the ones who have been expecting it daily for the past decade.
To see a 20% decline in NASDAQ and a 50% plunge in market leaders in the face of a 3.2% GDP growth rate and a 3.9% unemployment rate is a first. It makes no sense.
This wasn’t a correction. This was an instance where the market ceased to function and was effectively closed. In fact, it took a conspiracy of several independent forces to get the meltdown we got.
The bottom line here is that this is not your father’s stock market.
The low hanging fruit here is to blame in the high-frequency algorithms. But that is the cheap shot. Algos don’t care which way markets go. They take volatility up sharply, but they take it down as well, as any long-suffering vol player will tell you.
Over time, their market impact is neutral. And algo traders go home 100% in cash every night. That doesn’t explain opening meltdowns of 500 points a day or more. No, there was something much more structural at work.
Human emotions are easy to predict. Take the humans out of the equation and markets can only be read by mainframe computers, at least on a short-term basis. That’s why so many of these market traditions, like “Sell in May and go away,” and the “Santa Claus rally” have quit working.
Only about 10% of today’s daily traders are the breathing kind. The rest are all made of silicon. Even I have come to rely heavily on my own personal algorithms in the Mad Hedge Market Timing Index. It has been worth its weight in gold and saved my bacon many times.
There is no doubt that pure quant strategies have blood on their hands. These funds strictly adhere to rules that have identified the long-term relationships between different asset classes and act accordingly.
For example, when bonds go up, you sell them and buy more stock, but sell more foreign currencies as well, and perhaps pick up some copper as well. All of this is adjusted for risk and volatility. There is thought to be about $1.5 trillion committed to this kind of strategy.
Among these, you can include “risk parity traders” of the kind pioneered by my friend Ray Dalio in the 1990s. (Ray will tell you how he did it in his fascinating book, Principals, out last year). Ray, by the way, is one of the top performing money managers over the last 30 years.
Trend followers pour more gasoline on the fire. If you sell, they will sell more, creating these massive 100 handle days in the S&P 500 (SPY).
Heightening fears was a never-ending torrent of bad news out of Washington. Two out of three key cabinet positions were emptied by presidential firings and remain unoccupied. Trade talks with China came to an impasse. It was not what investors wanted to hear.
All of this set up the perfect storm for December.
Equity mutual fund redemptions hit a record $53 billion in early December. Market liquidity dramatically shrank as players took off for the holidays, as seen on the chart below. Liquidity during the second half of December was thinner than the worst days of the 2008 financial crisis.
A two-decade-long flight of capital from the floor of the New York Stock Exchange was also a factor. The inevitable result was for the Volatility Index (VIX) to take a run at its highs for the year.
If you wanted to sell anything in size, it could only take place at throwaway prices. It all culminated in the notorious Christmas Eve Massacre which saw a 1,000-point range day in the Dow Average in a holiday-shortened trading day. If it had been a full day it might have been down 2,000 points.
Don’t expect any respite from these strategies any time soon. In fact, we could see worse moves ahead. The current administration believes in a free market, non-interventionist approach to securities markets. That means no new regulation.
The same thing happened in the run-up to the 2008 crash when Christopher Cox (brother of my old boss at Morgan Stanley, Archie Cox) was basically told to go play golf instead of regulate.
Welcome to the new age of investing. The bottom line for all of us traders and investors is that we are going to have to pedal a lot harder to earn our crust of bread….or become a computer.
Did you Say “Buy” or “Sell”
Mad Hedge Hot Tips
January 10, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Macy's Disappoints, Crushing all of Retail With It, and taking down an overbought main market as well. It highlights an accelerating shift from brick and mortar to online which grew 20% YOY. Will Amazon sponsor those wonderful parades? Click here.
2) December Fed Minutes Come Out Mixed. The Fed has both hawks and doves. Who knew? Rate rises are still in the cards. Bad news, bond market.
3) The US May Lose Its Triple “A” Rating, thanks to the government shutdown according to Fitch, one of the oldest bond rating agencies. I knew we were on the way to becoming a banana republic. Keep your bond shorts (TLT). We’re raking it in. Click here.
4) Jeff Bezos to Get Divorced. Yikes! His wife Mackenzie is one of the first three Amazon employees and spent long nights shipping the early book sales. She is about to become the world’s wealthiest woman, worth $65 billion. Keep your stock for a run to $2,000. Hmmm, I’m twice widowed. The age is right…. Click here.
5) Lennar (LEN) is Seeing an Uptick in New Homes Sales, thanks to a 30-year mortgage rate that has plunged 50 basis points. It brings affordability within reach to a few million Millennials. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(JANUARY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (UUP), (FXE), (FXY), (FXA), (AAPL), (GLD), (SLV), (FCX), (SOYB), (USO), (MU), (NVDA), (AMD), (TLT), (TBT), (BIIB), (TSLA)
(TESTIMONIAL)
(HERE’S THE CANARY IN THE COAL MINE FOR APPLE),
(AAPL), (SWKS), (AMZN), (TSLA)