Mad Hedge Technology Letter
February 28, 2019
Fiat Lux
Featured Trade:
(WHY ETSY KNOCKED IT OUT OF THE PARK),
(ETSY), (AMZN), (WMT), (TGT), (JCP), (M)
Mad Hedge Technology Letter
February 28, 2019
Fiat Lux
Featured Trade:
(WHY ETSY KNOCKED IT OUT OF THE PARK),
(ETSY), (AMZN), (WMT), (TGT), (JCP), (M)
I wrote to readers that I expected online commerce company Etsy to “smash all estimates” in my newsletter Online Commerce is Taking Over the World last holiday season, and that is exactly what they did as they just announced quarterly earnings.
To read that article, click here.
I saw the earnings beat a million miles away and I will duly take the credit for calling this one.
Shares of Etsy have skyrocketed since that newsletter when it was hovering at a cheap $48.
The massive earnings beat spawned a rip-roaring rally to over $71 - the highest level since the IPO in 2015.
Three catalysts serving as Etsy’s engine are sales growth, strength in their core business, and high margin expansion.
Sales growth was nothing short of breathtaking elevating 46.8% YOY – the number sprints by the 3-year sales growth rate of 27% signaling a firm reacceleration of the business.
The company has proven they can handily deal with the Amazon (AMZN) threat by focusing on a line-up of personalized crafts.
Some examples of products are stickers or coffee mugs that have personalized stylized prints.
This navigates around the Amazon business model because Amazon is biased towards high volume, more likely commoditized goods.
Clearly, the personalized aspect of the business model makes the business a totally different animal and they have flourished because of it.
Active sellers have grown by 10% while active buying accounts have risen by 20% speaking volumes to the broad-based popularity of the platform.
On a sequential basis, EPS grew 113% QOQ demonstrating its overall profitability.
Estimates called for the company to post EPS of 21 cents and the 32 cents were a firm nod to the management team who have been working wonders.
Margins were healthy posting a robust 25.7%.
The holiday season of 2018 was one to reminisce with Amazon, Target (TGT), and Walmart (WMT) setting online records.
Pivoting to digital isn’t just a fad or catchy marketing ploy, online businesses harvested the benefits of being an online business in full-effect during this past winter season.
Etsy’s management has been laser-like focusing on key initiatives such as developing the overall product experience for both sellers and buyers, enhancing customer support and infrastructure, and tested new marketing channels.
Context-specific search ranking, signals and nudges, personalized recommendations, and a host of other product launches were built using machine learning technology that aided towards the improved customer experience.
New incremental buyers were led to the site and returning customers were happy enough to buy on Etsy’s platform multiple times voting with their wallet.
The net effect of the deep customization of products results in unique inventory you locate anywhere else, differentiating itself from other e-commerce platforms that scale too wide to include this level of personalization.
Backing up my theory of a hot holiday season giving online retailers a sharp tailwind were impressive Cyber Monday numbers with Etsy totaling nearly $19,000 in Gross Merchandise Sales (GMS) per minute marking it the best single-day performance in the company’s history.
Logistics played a helping hand with 33% of items on Etsy capable to ship for free domestically during the holidays which is a great success for a company its size.
This wrinkle drove meaningful improvements in conversion rate which is evidence that product initiatives, seller education, and incentives are paying dividends.
Overall, Etsy had a fantastic holiday season with sellers’ holiday GMS, the five days from Thanksgiving through Cyber Monday, up 30% YOY.
Forecasts for 2019 did not disappoint which calls for sustained growth and expanding margins with GMS growth in the range of 17% to 20% and revenue growth of 29% to 32%.
Execution is hitting on all cylinders and combined with the backdrop of a strong domestic economy, consumers are likely to gravitate towards this e-commerce platform.
Expanding its marketing initiatives is part of the business Josh Silverman explained during the conference call with Etsy dabbling in TV marketing for the first time in the back half of 2018, and finding it positively impacting the brand health metrics particularly around things like intending to purchase.
However, Etsy has a more predictable set of marketing investments through Google that offers higher conversion rates and the firm can optimize to see how they can shift the ROI curve up.
Etsy can invest more at the same return or get better returns at the existing spend from Google, it is absolutely the firm's bread and butter for marketing, particularly in Google Shopping, and some Google product listing ads.
With all the creativity and reinvestment, it’s easy to see why Etsy is doing so well.
Online commerce has effectively splintered off into the haves and have-nots.
Those pouring resources into innovating their e-commerce platform, customer experience, marketing, and social media are likely to be doing quite well.
Retailers such as JCPenney (JCP) and Macy’s (M) have borne the brunt of the e-commerce migration wrath and will go down without a fight.
Basing a retail model on mostly physical stores is a death knell and the models that lean feverishly on an online presence are thriving.
At the end of the day, the right management team with flawless execution skills must be in place too and that is what we have with Etsy CEO Josh Silverman and Etsy CFO Rachel Glaser.
Buy this great e-commerce story Etsy on the next pullback - shares are overbought.
“Well, if you can buy 1,000 of anything, it doesn't belong on Etsy” – Said CEO of Etsy Josh Silverman
Mad Hedge Hot Tips
February 28, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Bonds Get Crushed, down 1.38 points yesterday as the great “crowding out” begins. Massive corporate borrowing can’t compete with government borrowing, so rates are rising sharply. This is the beginning of the end. Sell short the (TLT). Click here.
2) 30 Feet of Snow in One Month, at Lake Tahoe is a new all-time record for a single month. It looks like my roof is going to get crushed for the second year in three. My insurance company hates me. I don’t know about you, but climate change is kicking my butt. Click here.
3) US Factory Orders Come in Incredibly Weak, at 0.1% in December when 0.6% was expected. Recession indicator number one million. Limit your risk. Click here.
4) Home Depot Announces a New $15 Billion Share Buy Back, to their existing program. It is the best investment they could ever make. (HD) has bought back 25% of its shares since 2010 while the shares rose by 2,000%. Companies are now the sole net buyers of stock in the market. Buy (HD) on dips.
5) 11 Million Americans Paying Substantially Higher Taxes, thanks to the loss of $323 billion in local tax deductions. The cap is now set at $10,000. Complain to your congressman. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(GOLD IS BREAK OUT ALL OVER),
(GLD), (GDX), (NEM),
(THE STEM CELLS IN YOUR INVESTMENT FUTURE)
(CELG), (TMO), (REGN)
(WHY ETSY KNOCKED IT OUT OF THE PARK),
(ETSY), (AMZN), (WMT), (TGT), (JCP), (M)
Global Market Comments
February 28, 2019
Fiat Lux
Featured Trade:
(GOLD IS BREAKING OUT ALL OVER),
(GLD), (GDX), (NEM),
(THE STEM CELLS IN YOUR INVESTMENT FUTURE)
(CELG), (TMO), (REGN)
Longtime readers of this letter are well aware that I have been bullish on gold since August. However, this week, the barbarous relic really got the bit between its teeth and is now poised to break out to a new five year high.
All of a sudden, the sun, moon, and stars have aligned in favor of a new leg of the bull market for gold. We could even see a bitcoin-style melt up over the next 18 months to its previous all-time high of $1,927 an ounce.
Gold is not seeing this in isolation. With the primary focus of all financial markets now exploding US deficits, inflation plays everywhere have found new vigor. These would include, other precious metals, commodities, energy, and any security that shorts the bond market.
The really great news here is that your investment life has suddenly gotten very easy. We are probably only months into a megatrend that could last for another decade.
If you look carefully at the long-term charts you will see that gold has in fact been in a new bull market for three years now. But the rate of appreciation was at a snail’s pace, with the yellow metal averaging only 14% a year since then.
For a while, bitcoin and other cryptocurrencies were stealing gold’s thunder and sucking up gold’s volatility. Inflation, the traditional driver of gold prices, was nowhere to be seen.
It is no accident that the recent strength in gold has been matched with the decimation of Bitcoin, down 80% from its high. Investors are finally seeing the light of day.
Other factors have been assisting in gold’s resurgence. Chinese dumping of US treasury bonds is freeing up lots of cash in the middle Kingdom to buy gold.
The run-up to the Chinese New Year on February 16, when Chinese traditionally settle debts with gold coin purchases, has thrown some exploding firecrackers on the move.
The Europeans saw the inflation boogeyman before we did. Look at the chart below showing global gold ETF purchases, which helped market the 2015 bottom. Some 75% of global flows into gold ETF’s were for Europe based funds.
The buying has spread into the entire precious metals space. The Van Eck Vectors Gold Miners ETF (GDX) is off to the races. So is Newmont Mining (NEM), Canada’s largest miner and one of my long-time favorites. (NEM) by the way, is considering a takeover offer from Barrick Gold (GOLD).
Look to buy dips in gold whenever you get them. Remember those black swans? They are still out there in a holding pattern awaiting landing instructions.
When they finally return, you’ll be happy you have a nice position in gold to hedge your other risk positions.
“We live in a world that is not described by classical economics,” said Oracle of Omaha Warren Buffet.
Mad Hedge Hot Tips
February 27, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Jay Stays Dovish Again, but markets yawn this time. How much mileage can you get from the same vague assertion? Shorts are about to swarm the market. Take profits on all longs. Click here.
2) India Attack Gives Gold a Boost. Even its one-day war with Pakistan is positive for the barbarous relic. Buy Gold (GLD) on Dips. Click here.
3) US Dollar Hits a Three-Week Low. The Fed’s dovish leanings are hammering the buck. Keep loading the boat with weak dollar plays, like emerging markets (EEM). Click here.
4) Wynn Resorts Gets Hit with $20 Million Fine, by Nevada regulators for sexual misconduct of the management. Stock doesn’t care as worse was expected. Apparently, everything DOESN’T stay in Vegas. Avoid (WYNN). Click here.
5) Pending Home Sales Jump 4.6%, in January in a rare positive data point from real estate. Still down 2.3% YOY. Lower interest rates are a factor. The West was the weakest where prices are highest. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WHY CHINA’S US TREASURY DUMP WILL CRUSH THE BOND MARKET),
(TLT), (TBT), ($TNX), (FCX), (FXE), (FXY), (FXA), (USO), (OXY), (ITB), (LEN), (HD), (GLD), (SLV), (CU),
(THE 13 NEW TRADING RULES FOR 2019)
(HOW AUTONOMOUS DRIVING WILL CHANGE THE WORLD),
(TSLA), (GM), (GOOGL)
Mad Hedge Technology Letter
February 27, 2019
Fiat Lux
Featured Trade:
(HOW AUTONOMOUS DRIVING WILL CHANGE THE WORLD),
(TSLA), (GM), (GOOGL)
The car insurance industry will grapple with a massive existential crisis of epic proportions unless they evolve.
The looming threat is caused by technology and autonomous driving.
This is why parents usher their children into industries that won’t be blown up by technological disruption.
Removing the driver from the automobile industry could be the single most societal shift in our lifetimes.
This technology is getting ramped up as we speak and Waymo is the clear leader that is already collecting money for commercial rides in the state of Arizona.
Car insurers must wonder if they will be able to charge the same amount if there are no drivers?
The answer is that the liability will head from the driver to the manufacturer with companies like General Motors (GM) Tesla (TSLA) likely footing the bill while the passenger is likely to pay minimally.
We are headed towards another data war with insurers incentivized to dismiss the relevance of data in self-driving cars and devaluing it will cause the car companies’ bills to go higher.
Car insurance companies are also heavily investing in data analytics teams to see which part of the pie and how big of it they can get from self-driving technology.
This is uncharted territory.
Consensus has it that by 2035, 23 million autonomous vehicles or around 10 percent of today’s total will grace our roads and highways.
But I believe this number is understating the underlying series of generational factors at play.
It’s no secret that the majority of Millennials and Generation Z want to live in coastal urban cores participating in the heart of downtown activities mainly because of the chance to find a high-paying job.
This has exacerbated the migration from rural to metro areas around the country and sapping the need to drive or buy a car when Uber can become an almost perfect substitute.
And don’t forget that according to the latest data, cars are stationary 92% of the time signaling consumers’ intentions to stop purchasing and instead rent cars by the minute, hour, and day.
That is the beauty of the sharing economy and how self-driving cars will fit in.
This avant-garde model will emerge between 2035 and 2050 effectively reducing the value of owning a car, the self-driving car that will be bought, probably by the self-driving tech company itself, could constitute 50% of all vehicles sold globally.
The sum of the parts could mushroom into a $3 trillion addressable market, not only made up of the physical cars but the assortment of ancillary technology needed to fuel these cutting-edge machines.
Alphabet’s (GOOGL) self-driving unit named Waymo run an onboard computer that processes images in real time using its machine learnings algorithm built by the industries’ best machine learning engineers.
However, not only do these firms need an army of artificial intelligence engineers to build the algorithms that are at the fulcrum of what they do, they also need other parts that fit into the puzzle such as lidar radar technology.
Lidar is an acronym for light detection and ranging, and the physical manifestation of this technology has so far been a cone-shaped object on top of the car's roof emitting laser pulses that bounce off objects allowing the car to recreate a 3D image of its surroundings.
The advancement of this technology and the potential production of scale will cut the cost of manufacturing this technology to less than $10 per sensor.
A full-blown lidar unit costs $75,000 at current market prices, but luckily the phenomenon of deflationary technology always drives the prices down to bare bones.
Cameras, sensors, cooling systems, and GPU chips are other products that must be heavily developed to accommodate self-driving technology.
GM is another prominent player in this field, and they have already outfitted close to 200 cars for testing.
The firm transformed its Orion Assembly plant in Michigan to accommodate cameras, lidar, and other sensors to its Chevrolet Bolt.
Whoever masters the lidar technology the quickest will have an inside edge to grab market share once this industry explodes and a lower insurance bill.
Waymo won’t be the only player usurping market share even though they are the brightest name out there, and there is room for others to crash the party.
GM invested $500 million into Lyft which could act as a gateway path into outfitting Lyft cars with GM’s proprietary technology.
Whoever specializes in the art of licensing self-driving technology to companies will ring in the register as well and the opportunities abroad are endless because emerging economies aren’t players in this industry.
GM’s Cruise AV has opened eyes with GM removing pedals or a steering wheel for this electric car.
It’s under testing in select cities and GM plans to integrate it into its ride-sharing program.
Investors are still waiting for companies to telegraph meaningful revenue to the top line, and this teething phase could cause the impatient to bolt for greener pastures.
Waymo has claimed it will be able to deliver up to 1 million trips per day by 2022 signaling that real top line revenue appears a few years off at the earliest.
This trade isn’t for the smash-and-grab type, but this is the future and it will be a slow crawl to broad-based adoption and material revenue.
The death of the car insurance industry is still years away and insurers still have time to save their bacon.
Data at the Association for Safe International Road Travel (ASIRT) shows that nearly 1.25 million people die in road crashes each year, on average 3,287 deaths a day and another 20-50 million are injured or disabled.
Technology is on the move and will try to correct this awful trend in road safety and human fatalities.
These years could be the high-water mark for car insurance and as self-driving technology continues to seep deeper into the public consciousness, it could snatch revenue from the coffers of the insurance companies.
But if these legacy companies become nimble and embrace the changes, they could potentially be at the vanguard of a highly lucrative industry charging the likes of GM and Tesla to ferry around humans.
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