The Five Most Important Things That Happened Today
(and what to do about them)
1) Don’t Miss the Mad Hedge 2019 All Asset Class Review on Wednesday, at 12:00 PM EST. Click here.
2) China Cuts Bank Reserve Requirements, injecting $200 billion into the economy. The last time they did this we saw a monster rally in stocks. It turns out that the Middle Kingdom has a far healthier balance sheet than the US. Click here.
3) Saudi Arabia Chops Oil Production, sending prices soaring. It not too late to get into what could be a 40% bottom to top rally (USO). Click here.
4) Bristol Meyers (BMY) Buys Celgene (CELG), sparking what could be the big sector trend of 2019. It’s still early days for what will be the best performing sector of 2019. Click here.
5) “Toxic” is named the Word of the Year, by the Oxford English Dictionary. Gee, I wonder where they got that one. It far overshadows 2017’s pick “youthquake.” Click here.
Published today in the Mad HedgeGlobal Trading Dispatch and Mad Hedge Technology Letter:
(DON’T MISS THE JANUARY 9 GLOBAL STRATEGY WEBINAR),
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 Trader2019-01-08 13:35:042019-01-08 13:35:04Mad Hedge Hot Tips for January 8, 2019
Lately, Apple’s tumultuous short-term weakness is indicative of the broader mare’s nest that large-cap tech is confronting, and the unintended consequences this monstrous profit-making industry causes.
These powerful tech companies have sucked out the marrow of the innovative bones that the American economy represents, applying this know-how to pile up ceaseless profits to the detriment of the incubational start-ups that used to be part and parcel of the DNA of Silicon Valley.
In the last few years, the number of unicorns has been drying up rapidly on a relative basis to decades of the ’90s and the early 2000s – this is not a startling coincidence.
The mighty FANGs were once fledging start-ups themselves but have become entrenched enough to the point they transcend every swath of culture, society, and digital wallet now.
Becoming too big to boss around has its competitive advantages, namely harnessing the hoards of data to destroy any competition that has any iota of chance of uprooting their current business model.
And if these large tech companies can “borrow” the innovation that these smaller firms cultivate, they wield the necessary resources to undercut or just decapitate the burgeoning competition.
The net effect is that innovation has been crushed and the big tech companies are milking their profits for what its worth.
Fair?
Not at all.
But tech has never been a fair game and going to a gun fight with a knife is why militaries incessantly focus on technology to accrue a level of firepower head and shoulders above their peers.
The career of Co-Founder of Jet.com, an e-commerce platform bought by Walmart for $3.3 billion in 2016, perfectly illustrates my point.
Marc Lore was born from the mold of leaders such as Amazon (AMZN) founder Jeff Bezos, leveraging the wonders and functionality of the e-commerce platform to construct a thriving business empire.
Quidsi, an e-commerce company, was founded by Marc Lore on the back of Lore maxing out personal credit cards to rent trucks to head to wholesale stores up and down the East coast to buy diapers, wipes, and formula in large quantities.
Under the umbrella of Quidsi, diapers.com and soap.com were successful e-commerce businesses and a segment that Amazon hadn’t cracked yet.
CEO of Amazon Jeff Bezos identified Lore as a mild threat to his low-end pricing, high-volume business empire.
Yes, this was a market grab, but to avoid a looming and an escalating price war, Amazon bought Quidsi for $500 million and $45 million of debt leaving Lore with millions after repaying earlier investors but effectively neutering Lore and putting him out to pasture.
The best way to ensure there is not another Jeff Bezos is for Jeff Bezos to buy out the upcoming Jeff Bezos before he can get close enough to go for the kill.
While both Bezos and Lore extolled the acquisition with pleasantries, Lore later described it as a glass half empty scenario akin to a mourning.
Getting a golden parachute-like payment for innovation is the best-case scenario for these up and coming stars of tech.
Others aren’t as lucky.
The castle that Bezos built and this type of reaction to stunting competition cannot be quantified and has a net negative effect on the overall level of innovation in the tech sector.
Then there is the worst-case scenario for tech companies such as Snapchat (SNAP). They have been courted numerous times by Facebook (FB) and offered sweetened deals that most people would salivate over.
Each rebuff followed a further Facebook retrenchment onto Snapchat’s territory hoping that they would gradually tap out from this vicious headlock.
In return, Snapchat has had the Turkish carpet pulled out from underneath them and most of their in-house innovation has been borrowed by Facebook’s subsidiary social media platform Instagram.
During this time span, Snapchat’s share price has nosedived and the defiant Snapchat management has lost the momentum and bravado that was emblematic to their business model.
Innovation has also been strangled in Venice, California as declining usership has been partly due to a lack of fresh features and an emphasis on profit creation instead of innovation that led to a botched redesign and sacking of 100 engineers.
Then there is that one's company, two's a crowd and three's a party and Snapchat’s growth model trailed Facebook and Twitter who took advantage of the era of zero regulation to build usership and brand awareness.
Snapchat was late to the feast and has suffered because of it.
The climate and mood for social media have significantly soured in the past six months and have tainted this whole niche sector with one toxic stroke with a brushstroke that has encapsulated any company within two degrees of this sector.
So where do the innovative problems start with Apple?
Right at the top with CEO Tim Cook.
Apple is known for brilliantly rewriting history and not fine-tuning it.
This is why I have preached the emphatic value of erratic but visionary leaders such as Steve Jobs and Elon Musk.
They take big risks and do not apologize for their smoking weed on podcasts and laugh about it.
Investors put up with these shenanigans because these leaders understand the scarcity value of themselves.
They don’t play it safe even if profits are the easiest option.
To save Apple, Apple would need to hire Square and Twitter CEO Jack Dorsey to innovate out of this mess.
The stock would double from here because Dorsey would bring back the innovative juices that once permeated through the corridors in Cupertino through Job’s genius ideas.
Under Cook’s tutelage, Apple has made boatloads of cash, but they were going to do that anyway because of Steve Job’s creations.
However, Cook has presided over China rapidly encroaching on its revenue source and is over-reliant on iPhone revenue.
They had years to develop something new but now China is beating Apple at its own game.
Not only has the smartphone market sullied, but so has the relative innovation that once saw every iPhone iteration vastly different from the prior generation.
The petering out of innovative smartphone features has gifted time to the Chinese to figure out how to snatch iPhone loyalists in China with vastly improved devices but at a way lower price point.
The erosion of Samsung’s market share in China should have been a canary in the coal mine and China is in the midst of replicating this same phenomenon in India too.
And I would argue that this would have never happened if Steve Jobs was still alive.
Jobs would have reinvented the world two times over by now with a product that doesn’t exist yet because that is what Jobs does.
As it is, Cook, a great operation officer, is a liability and probably should still be an operations manager.
Cook blared the sirens in early January with a public interview saying that revenue would drop by $9 billion.
This was the first profit warning in 16 years and won’t be the last if Cook retains his position.
Cook has steered the mystical Apple brand careening into the complex dungeon of communist China and was late to react.
Jobs would act first and others would have to react to his decisions, a staple of innovation.
Sailing Apple’s ship into the eye of the China storm stuck out like a sore thumb once Trump took over.
Adding insult to injury, consumers are opting for cheaper Android-based phones that function the same as iPhones.
The 10% of quality that Apple adds to smartphones isn’t enough to persuade the millions of potential customers to pay $1000 for an iPhone when they can get the same job done with a $300 Android version.
Cook badly miscalculated that Apple would be able to leverage its luxury brand to convince prospective buyers that iPhones would be a daily fixture and can’t-miss product.
Even though it was in 2010, it isn’t now.
The type of price points Apple is offering for new iPhone iterations means that this version of the iPhone should be at least 35% or 40% better than the previous version giving the impetus to customers to trade-up.
Sadly, it’s not and Cook was badly caught out.
Therefore, it is confusing that Apple didn’t apply more of its mountain of capital and luxurious brand status to cobble together a game-changing product.
Cook could have put his stamp on the Apple brand and might not have the chance now.
Cook being an “operations guy” has gone to the well too many times and the narrative and direction of Apple is a big question mark going forward.
This is the exact time needed for some long-term vision.
What does this all mean?
The shares’ horrific sell-off means that it is in line for some breathing room from the relentless downward price action.
However, unless the geopolitical tornados can subside, Apple debuts a Steve Jobs-esque bombshell of a product, or Square (SQ) CEO Jack Dorsey takes over the reins in Cupertino, the share price has limited upside in the short-term.
Apple will not have the momentous and breathtaking gap ups until something is fundamentally changed in the house that Steve Jobs built and that is what the tea leaves are telling us.
This has led me to execute a deep-in-the money put spread to take advantage of this limited upside.
Apple is a great long-term hold, but even Cook is threatening this premise.
As Cook is stewing in his office pondering his uncertain future, he forgets what it was that got Apple to the top of the tech ladder – innovation and lots of it.
The Mad Hedge Technology Letter ranks innovation as the most important input and x-factor a tech company can possess.
Steve Jobs understood that, yet, failed to pass on this hard-learned but important lesson to his protégé.
If Apple stays on the same track, they risk being the next Nokia (NOK) or Blackberry (BB).
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/iPhone-jan8.png420783Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-08 08:06:082019-07-09 04:58:34Why I Sold Short Apple
https://www.madhedgefundtrader.com/wp-content/uploads/2018/09/Jeff-Bezos-quote-of-the-day-1.jpg284221Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-08 08:05:482019-07-09 04:58:38January 8, 2019 - Quote of the Day
My 2019 Asset Class webinar will be held live from Silicon Valley on Wednesday, January 9, at 12:00 PM EST.
Co-hosting the show will be Mad Day Trader Bill Davis.
I’ll be giving you my updated outlook on stocks, bonds, commodities, currencies, precious metals, energy, and real estate.
The goal is to find the cheapest assets in the world to buy, the most expensive to sell short, and the appropriate securities with which to take these positions.
I will also be opining on recent political events around the world and the investment implications therein.
I usually include some charts to highlight the most interesting new developments in the capital markets. There will be a live chat window with which you can pose your own questions.
The webinar will last 45 minutes to an hour. International readers who are unable to participate in the webinar live will find it posted on my website within a few hours.
I look forward to hearing from you.
To log into the webinar, please click on the link we emailed you entitled "Next Bi-Weekly Webinar – January 9, 2019"
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/John-Thomas-tesla.png404558Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-08 01:07:042019-01-08 14:05:48Don’t Miss the 2018 Annual Asset Class Review
https://www.madhedgefundtrader.com/wp-content/uploads/2014/04/Kids-Bubbles.jpg283426DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2019-01-07 03:05:532019-02-07 03:19:12Quote of the day - January 7, 2019
It seems time after time, entire industries get flipped on their heads without notice.
The modern-day hyper-acceleration of technology is creating tectonic shifts in the economy that only some can truly understand.
There is the good, the bad, and the ugly.
The functionality of technology has helped enhance our daily lives infinitely, yet there is a dark side of technology that has reared its ugly head threatening the future existence of mankind.
One industry next in line to be smashed to bits will have the effect of unimaginably reshaping Wall Street as we know it.
Gone are the days of brokers shouting from the trading pits, a bygone era where pimple-faced traders cut their teeth rubbing shoulders with the journeymen of yore.
The stock brokerage industry is at an inflection point with the revolutionary online stock brokerage Robinhood on the verge of shaking up an industry that has needed shaking up for years.
A common thread revisited by this newsletter is the phenomenon of broker apps being low-quality tech.
These apps can be built by a pimple-faced freshman college student in his dorm.
A broker ultimately serves little or no value to the real players among the deal, usually extracting huge commissions.
Technology and now blockchain technology vie to completely remove this exorbitant layer from the business process.
Well, for the stock brokerage industry, that time is now.
Robinhood is an online stock brokerage company based in Menlo Park, Calif., trading an assortment of asset classes including equities, options, and cryptocurrencies.
So, what's the catch?
Robinhood does not charge commission.
That's right, you can invest up until the $500,000 threshold protected by the Securities Investor Protection Corporation (SIPC) and you can go along with your merry day trading for free.
The online brokerage industry has been getting away with murder for years.
How did the online brokers get away with this in a technological climate where industries such as the transportation sector are being flipped on their head?
They got comfortable and stopped innovating - the death knell of any company.
Effectively, high execution costs reaping massive profits were the norm for brokers, and nobody questioned this philosophy until Robinhood exposed the ugly truth - unreasonably high rates.
Peeking at a monthly chart of brokerage costs will make your stomach churn.
For instance, a trader frequently executing trades with an account of $100,000 would hand over $1836 in commission in 2017 if their account was with Fidelity.
On the cheaper side, Interactive Brokers would charge $854 for its brokerage services to habitual traders per month.
The outlier was Tradier, a start-up brokerage founded in 2014 using the powerful tool of an API (Application Programming Interface) which charged $213 per month to trade frequently.
An API is described as a software intermediary allowing two applications to communicate with each other.
This model helped cut costs for the online brokerage because Tradier did not have to focus its funds on the trading platform that was delegated to various third-party platforms.
Tradier is largely responsible for the aggregation of data and charts thus employing an army of developers to meet their end of the business.
This model is truly the democratization of the online brokerage industry, which has been coming for years.
Costs are cut to a minimum with equity trades at Tradier costing investors $3.49 per order and options contracts costing $0.35 per contract with a $9 options assignment and exercise fee.
Technology has defeated the traditionalist again.
Day traders will tell you their largest worry is keeping a lid on execution costs.
Volume traders plan their strategies according to bare bones commission.
Marrying technology with online brokerages has the deflation effect that Amazon (AMZN) deftly took advantage of perfection.
Brokerages do not pay higher costs for an incremental bump in trading volume. Costs are mainly fixed.
If you hold a trading account in one of these legacy brokers charging an arm and a leg to trade with them, jump ship and join the revolution.
So how does Robinhood generate revenue if the broker trades for free?
Hawk ads? No.
They are not rogue ad sellers such as Facebook (FB).
The plethora of accounts opened with Robinhood earn interest, and Robinhood collects the earned interest as revenue.
Also, Robinhood has one paid service for sale.
Robinhood Gold is a subscription allowing traders to use margin. The margin accounts will set traders back $10 per month adding up to $120 per year, and they won't be charged interest on the funds.
This is peanuts compared to what other traditional brokerages are charging clients for margin account interest.
This is also a data grab with the proprietary data building up profusely turning into a potential Masayoshi Son SoftBank Vision fund acquisition.
Robinhood has almost registered a staggering 6 million accounts since 2013 – a staggering feat for an unknown and the momentum is palpable.
The meteoric rise of Robinhood coincided with the explosion of the price of bitcoin breaching the $20,000 level.
This price surge inspired a whole generation of millennials to get off the sofa and start trading cryptocurrencies.
More than 80% of Robinhood's accounts are owned by millennials – as expected.
Trading cryptocurrencies act as a gateway asset to springboard into other asset classes such as equities and derivative contracts.
Vlad Tenev, co-CEO of Robinhood, indicated that Robinhood will have to modify its radical business model to monetize more of the business in the future, but he is comfortable with the current business model.
But Tenev has already seen fruit borne with the likes of Robinhood applying fierce pressure to the legacy brokerages' pricing models.
The traditionalists are locked in a vicious pricing war with each other slashing their commission rates to stay competitive.
The longer the likes of Charles Schwab (SCHW) feel it necessary to charge $4.95, down from the January 2017 cost of $8.95, the better the chances are that Robinhood can build its account base rapidly.
Charles Schwab has more than 10 million accounts, only double the number of Robinhood, after being founded in 1971.
The 42-year head start over Robinhood has not produced the desired effect, and it is ill-prepared to battle these tech companies that enter the fray.
Robinhood has been able to add a million new accounts per year. If Charles Schwab relatively performed at the same rate, it would have 47 million accounts open today.
It doesn't and that is a problem because the company can be caught up to.
The lack of urgency to combat the tech threat is astounding. Companies such as Walmart (WMT) have taken the initiative to transform the narrative with great success.
The race to zero is a grim reality for the Fidelities (FFIDX) of the world, and adopting a Robinhood approach will be the playbook going forward.
Brokerages and a slew of other industries are turning into a legion of top-level developers fighting tooth and nail to stay relevant.
The transportation industry has grappled with this harsh reality lately, but the economy is on the cusp of many other industries digitizing to the extreme.
My guess is that Robinhood starts rolling out a slew of subscription services catering toward specific investors.
The age of specialization is upon us with full force, and customer demand requires care and diligence that never existed before.
Robinhood continues to enhance its offerings of various products adding Litecoin and Bitcoin Cash to the crypto lineup.
Only Bitcoin and Ethereum were offered before.
And there is one more outrageous thing I forget to tell you.
Robinhood is in the midst of going after traditional savings accounts by offering checking and savings accounts offering an interest rate almost 30 times larger than most brick and mortar banks – 3%.
These accounts would have no minimum balances or no fees that nickel and dime customers.
The service will conveniently sit alongside its trading app and this move into the industry led by JP Morgan could start to derail Wall Street.
As with most FinTech start-ups, the roll-out of this new service was slightly botched because Robinhood failed to get the go-ahead from regulators concerning ensuring the accounts properly.
All this does is delay the inevitable and by spring 2019, potential customers should be earning 3% in Robinhood’s checking and savings account.
Sign me up!
The company is not without headline investors boasting the likes of Andreessen Horowitz, the venture capitalist firm based in Menlo Park, Calif., Box (BOX) CEO Aaron Levie, and hip-hop mogul Snoop Dogg.
Expect Robinhood to pile the funds into improving the technology, data accuracy while offering more hybrid products.
The enhancements will attract another wave of adopters spawning another wave of panic from the legacy brokers.
All of this explains how Robinhood snapped up 6 million users and almost a $6 billion valuation in only 5 years – if the Batman of FinTech innovation is Square (SQ) then Robinhood is seriously the Robin of innovation at the same time.
To visit the pricing information at Robinhood, please click here.
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