Mad Hedge Technology Letter
April 1, 2019
Fiat Lux
Featured Trade:
(THE NEXT TECH BUBBLE TOP HAS STARTED)
(LYFT), (PIN), (UBER), (AAPL), (JPM), (FB)
Global Market Comments
April 1, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE INMATES ARE RUNNING THE ASYLUM)
(SPY), (TLT), (FCX), (DIS), (TSLA), (IWM), (AAPL),
(GOOGL), (MSFT), (PYPL), (AMZN)
Don't go chasing rainbows.
That is what the current tech IPO environment is hinting.
Even though market conditions are frothy, that doesn't mean I'm calling a market top today, hardly so.
I predicted that Lyft (LYFT) would storm out of the gate like a bull on ecstasy, and I was vindicated when the stock flirted intraday with the $87 mark.
The scarcity value of these gig economy companies is hard to quantify.
Examples Uber unduly promise ambition and innovation leading to hopes of a possible air transport service and sharing network that I would need to see to believe.
The built-up expectations smell of over-promising and under-delivering, the majority won’t be able to deliver merely half of what their manifestos promulgate
As I put my analyst hat on, the 2019 IPO frenzy coming online has some of the same fingerprints of the infamous dot com bust of 2001.
The two main trends symbolic of the last time the tech industry disentangled were overly generous valuation, pricing in revenue expansion of 80% for the next five years when the leader of the pack Microsoft (MSFT) only grew at 50%.
A tantalizing clue was the utterly deficient cash flow generated back then.
The underlying premise revolved around putting the network effect on a pedestal irrespective of understanding that the network effect should have caused cash flow to accelerate which was conspicuously absent.
Losing money and losing a lot of it does lead to paralysis, examples were rife, for instance, priceline.com losing $30 on each air ticket sold.
Even more hard to fathom was that Priceline was stretching itself to the limits on the open market filling ticket orders because of a dearth of inventory steepening losses.
Priceline gushed about a unique business model of collecting excess ticket inventory that airlines couldn't sell at low cost and reskinning them to a digital audience hoping to take advantage of this price dispersion.
But in reality, this wasn’t always the case.
Priceline was on a suicide mission and expanding from 50 employees to 300 employees based upon misleading growth was madness.
In a nutshell, investors bypassed pragmatic arithmetic and were lifted by the fumes of exuberance that had manifested around the euphoria of the tech bubble.
Lyft is not revolutionary, they are a broker which occupy a low position in the spectrum of tech intellectual property.
Exploiting drivers, compensating them per hour, and letting them figure out their own cost structures for car insurance, fuel costs, and opportunity cost while offering zero benefits is a court battle waiting to happen in California.
And if your response was the way they craft value is by way of a proprietary app, well, Google, Apple, or even Netflix can produce the same type of app and quality of app in a few weeks with their legendary phalanx of top-tier engineering talent.
To Lyft’s credit, they have at least collected the treasure trove of data the app has compiled which is extraordinarily valuable.
The top of the tech bubble means that big tech is overreaching into any revenue they can get their hands on like a heroin addict yearning for the next syringe.
The environment has transformed into an eerily zero-sum game, such as Apple (AAPL) cooperating with JPMorgan Chase (JPM) to create Apple pay, and then instantly flipping around to compete with JPMorgan Chase in the credit card space with Apple Pay being an accomplice.
Big tech has sown the seeds of discord by quietly attempting to trample on any analog business they can get near.
Leveraging the network effect of billions of users in a proprietary walled garden to extract the incremental dollar for a new service is impossible to compete with for analog companies without a similar embedded on-demand audience.
Lyft co-founder and CEO Logan Green mentioned in an interview that in the next five year, he plans to deploy a subscription service coined as transportation-as-a-service like a software-as-a-service option which cloud platforms sell.
A fight to the bottom with Uber will cause major disruption in the pricing mechanisms of the subscription service and could force Lyft to earn less revenue per ride than the current pricing system.
Investors need to remember that Uber is bigger than Lyft and possessed more ammunition.
At the end of the day, the race to the bottom is never good for profitability or sustainability, and Lyft has yet to provide any substantial clues on how they will navigate through this quagmire.
My guess is that Lyft will have to do a deal with the devil of sorts to slang its branded broker app onto the cresting wave of Waymo as Waymo motors ahead and starts to materially monetize its self-driving program.
Remember that Alphabet already has a small stake in Lyft and these two could partner up with Alphabet dictating terms.
Lyft cannot compete with the holy grail of tech - self-driving technology – they are way down the tech value chain.
If we look at the bigger picture, the broader market has been riding the coattails of Federal Reserve Chairman Jerome Powell’s 180-degree turn from winter’s statement that interest rate tightening was on “autopilot.”
Now, there is only a 27% chance given by the market that the Fed will raise rates at all in 2019.
The market responded with strength begetting strength allowing the bull run to continue and even whispers of a possible rate cut later this year.
Sentiment will not change until we get to the point when earnings can’t surpass the expectation which have been lowered substantially.
I bet this won’t happen until late this year or next year.
This is inning 8 or 9 of the bull crusade, the closer is warming up in the bullpen.
Lyft’s opening day gallop is just one of the side effects from a market that is toppy.
I have decided to run for president next year. If you wondered why my content has been slacking off lately, it’s because I’ve been hard at work writing the Mueller Report. Oh, and the Dow Average will reach 100,000 by December.
Ha! Gotcha! April fool.
Still, looking at the market action last week, you really have to wonder if the inmates have seized control of the asylum when the average rose four of five days. These are people who are buying stocks at a decade high, with collapsing earnings, and the rest of the world falling into recession.
However, there is a method to their madness. Interest rates across every maturity in Europe and Japan turned negative last week. Suddenly both US stocks AND bonds looked like the bargain of the century, but only if you were foreign. An avalanche of cash into the US followed triggering an explosive move up in the bond market. For the first time in three years, I was not short.
And here’s the interesting part. It could continue for months.
In the meantime, investors have been grappling with a number that will be the most important print of the year. The first look at Q1 2019 GDP will be published on April 23, and it is widely expected to be awful, at less than a 1% annual rate. It will include the effects of the record 34-day government shutdown as well as the horrendous weather and flooding of last winter.
So, on the one hand, you have a stock market that is simultaneously being propped up by enormous cash flows and held back by a weakening economy and earnings and profit-taking from the best quarterly start in ten years. It all adds up to a market that could go absolutely nowhere.
And I just so happen to have the perfect portfolio for such a market. These are the precise conditions where deep in-the-money call and put option spreads absolutely prosper. When everything is going nowhere, spreads always expire at their maximum profit points.
The global easing trend is accelerating as central banks rush to head off the next global recession. Expect interest rates to drop to levels you once thought impossible.
The global bond short covering panic continues, with ten-year US Treasury yields dropping to an eye-popping 2.33%. Slowing global growth is to blame. Did I hear the word “refi”?
Foreign investors poured into the US bond market, driving ten-year US Treasury yields down to 2.33%. When everyone else in the world has negative yields, our bonds become the best paying in the world.
Q4 GDP final report came in at 2.2% as expected, down a third from Q3. Expect that figure to more than halve in Q1 2019. Put on your hard hat.
The Mueller Report gave Trump a clean bill of health, at least on the collusion issue. But it opened up a dozen other lines of investigation that will continue for years. It’s definitely a “RISK ON” development.
US Existing Home sales jumped 11.8% in January. Low mortgage interest rates are finally kicking in with the 30-year fixed at 4.23%. This is a one hit wonder, not the beginning of a new trend. But interest rates are going lower.
New Home Sales were up 4.9% to 667,000 units in February in a rare positive data point. Could low interest rates finally be kicking in? Still, avoid homebuilders.
Apple (AAPL) announced its new streaming service, Apple TV Plus, and the stock fell on a “sell the news” drop. Roku is included in the package so buy (ROKU). The Apple offering is weak enough to allow plenty of room for Disney to launch its own streaming service Disney Plus at the end of this year. Prepare for an onslaught of princesses. Buy (DIS) too.
Home price appreciation hit a four-year low with the S&P Case Shiller National Home Price Index growing only 4.2% YOY in January, down from 4.6% the previous month. Las Vegas, Phoenix, and Minneapolis are still showing the biggest gains while San Francisco and Seattle are seeing the biggest price drops. Avoid homebuilders (ITB).
Lyft (LYFT) priced at $72 a share, the top end of expectations, valuing the company at an eye popping $25 billion at the end of the day. Never mind that the company is losing money hand over fist, it’s all about potential. The tech IPO bubble top has started!
The Mad Hedge Fund Trader was up on the week with time decay in our combed 13 positions our best friend. The quarter end window dressing was kind to us.
March turned positive in a final burst, up 1.78%. My 2019 year to date return retreated to +15.49%, boosting my trailing one-year return back up to +35.16%.
My nine-year return recovered to +315.56%, a new all-time high. The average annualized return appreciated to +33.81%. I am now 45% in cash, 30% long and 25% short, and my entire portfolio expires at the April 18 option expiration day in 9 trading days. I took generous profits on my positions in copper miner Freeport McMoRan (FCX) right when it bounced off the 200-day moving average.
The Mad Hedge Technology Letter maintained long positions in Microsoft (MSFT), Alphabet (GOOGL), and PayPal (PYPL), and Amazon (AMZN), which are clearly going to new highs.
It’s jobs week again with the usual trifecta of employment reports. Last month was a disaster, so this month will be interesting.
On Monday, April 1 at 8:30 AM, February Retail Sales are published.
On Tuesday, April 2, 8:30 AM EST, we learn February Durable Goods.
On Wednesday, April 3 at 8:15 AM, the ADP Employment Report comes out for private hiring.
On Thursday, April 4 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, April 5 at 8:30 AM, we obtain the big number of the week, the February Nonfarm Payroll Report.
The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’m going to use a rare spell of good weather to drive up to Lake Tahoe and start the planning work on my October 25-26 Mad Hedge Lake Tahoe Conference. Half the dinner tickets sold out on the first day, so you better get moving now.
Maybe it’s something I said? To learn more about the conference, please click here. I’ll see you there.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“Our goal was to completely change transportation. Change traffic. And make it possible to get anywhere you want to go without owning a car.” – Said Lyft Co-Founder and CEO Logan Green
