“Markets will over value what you can quantify,” said Ann Lamont at Oak Investment Partners, referring to the extreme high prices for public companies versus the discount valuations of private ones.
Mad Hedge Hot Tips
April 3, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) See You at the Skybridge SALT Conference in Las Vegas, May 7-10, the Woodstock of alternative asset investors. Learn what the hedge funds are planning next, and it’s a blast. Meet former UN Ambassador Nikki Haley, AOL Founder Steve Case, Carlyle Group co-founder David Rubenstein, and hyper entrepreneur Mark Cuban. Click here.
2) Oil Prices are Going Ballistic, up four days in a row, topping $62 a barrel. OPEC has developed a new short squeeze. It’s going to be hitting the local pump soon, just as the peak driving season is approaching. Click here.
3) US Auto Sales Were Terrible in Q1, the worst quarter in a decade. General Motors (GM) suffered a 7% decline with Silverado pickups off 16% and Suburban SUVs plunging 25%. Is this a prelude to the Q1 GDP number? Risk is rising. Click here.
4) Trump Called Fed Governor on the March Stock Dip. Is this micromanaging, or what? Talk about a free put on the market. Risk on! Click here.
5) Semiconductor Index Hits New All-Time High. Advanced Micro Devices (AMD), a Mad Hedge favorite, soars 9%. It’s the future, so why not? Buy dips. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WHO WILL BE THE NEXT FANG?)
(FB), (AMZN), (NFLX), (GOOGL), (AAPL),
(BABA), (TSLA), (WMT), (MSFT),
(IBM), (VZ), (T), (CMCSA), (TWX),
(YOUTUBE’S BIG MOVE INTO INDIA)
(GOOGL), (NFLX), (AMZN)
Global Market Comments
April 3, 2019
Fiat Lux
Featured Trade:
(WHO WILL BE THE NEXT FANG?)
(FB), (AMZN), (NFLX), (GOOGL), (AAPL),
(BABA), (TSLA), (WMT), (MSFT),
(IBM), (VZ), (T), (CMCSA), (TWX)
FANGS, FANGS, FANGS! Can’t live with them but can’t live without them either.
I know you’re all dying to get into the next FANG on the ground floor, for to do so means capturing a potential 100-fold return, or more.
I know because I’ve done it four times. The split adjusted average cost of my Apple shares is only 25 cents compared to today’s $174, so you can understand my keen interest. My average on Tesla is $16.50.
Uncover a new FANG and the riches will accrue rapidly. Facebook (FB), Amazon AMZN), Netflix (NFLX), and Alphabet (GOOGL) didn’t exist 25 years ago. Apple (AAPL) is relatively long in the tooth at 40 years. And now all four are in a race to become the world’s first trillion-dollar company.
One thing is certain. The path to FANGdom is shortening. It took Apple four decades to get where it is today, Facebook did it in one. As Steve Jobs used to tell me when he was running both Apple and Pixar, “These overnight successes can take a long time.”
There is also no assurance that once a FANG always a FANG. In my lifetime, I have seen far too many Dow Average components once considered unassailable crash and burn, like Eastman Kodak (KODK), General Electric (GE), General Motors (GM), Sears (SHLD), Bethlehem Steel, and IBM (IBM).
I established in an earlier piece that there are eight essential attributes of a FANG, product differentiation, visionary capital, global reach, likeability, vertical integration, artificial intelligence, accelerant, and geography.
We are really in a “What have you done for me lately” world. That goes for me too. All that said, I shall run through a short list for you of the future FANG candidates we know about today.
Alibaba (BABA)
Alibaba is an amalgamation of the Chinese equivalents of Amazon, PayPal, and Google all sewn together. It accounts for a staggering 63% of all Chinese online commerce and is still growing like crazy. Some 54% of all packages shipped in China originate from Alibaba.
The juggernaut has over half billion active users, and another half billion placing orders through mobile phones. It is a master of AI and B2B commerce. There is nothing else like it in the world.
However, it does have some obvious shortcomings. Its brand is almost unknown in the US. It has a huge problem with fakes sold through their sites.
It also has an ownership structure for foreign investors that is byzantine, to say the least. It is a contractual right to a share of profits funneled through a PO box in the Cayman Island. The SEC is interested, to say the least.
We also don’t know to what extent founder Jack Ma has sold his soul to the Beijing government. It’s probably a lot. That could be a problem if souring trade relations between the US and the Middle Kingdom get worse, a certainty with the current administration.
Tesla (TSLA)
Before you bet on a new startup breaking into the Detroit Big Three, go watch the movie “Tucker” first. Spoiler Alert: It ends in tears.
Still, Tesla (TSLA) has just passed the 270,000 mark in the number of cars manufacturered. Tucker only got to 50.
Having led my readers into the stock after the IPO at $16.50, I am already pretty happy with this company. Owning three of their cars helps too (two totaled). But Tesla still has a long way to go.
It all boils down to the success of the $35,000, 200-mile range Tesla 3 for which it already has 500,000 orders. So far so good.
It’s all about scale. If it can produce these cars in sufficient numbers, it will take over the world and easily become the next FANG. If it can’t, it won’t. It’s that simple.
To say that a lot is already built into the share price would be an understatement. Tesla now trades at ten times revenues compared to 0.5 for Ford (F) and (General Motors (GM). That’s a relative overvaluation of 20:1.
Any of a dozen competing electric car models could scale up with a discount model before they do, such as the similarly priced GM Bolt. But with a ten-year lead in the technology, I doubt it.
It isn’t just cars that will anoint Tesla with FANG sainthood. The firm already has a major presence in rooftop solar cell installation through Solar City, utility sized solar plants, industrial scale battery plants, and is just entering commercial trucks. Consider these all seeds for FANGdom.
One thing is certain. Without Tesla, there wouldn’t be s single mass-market electric car on the road today.
For that, we can already say thanks.
Uber
In the blink of an eye, ride sharing service Uber has become essential for globe-trotting travelers such as myself.
Its 2 million drivers completely disrupted the traditional taxi model for local transportation which remains unchanged since the days of horses and buggies.
That has created the first $75 billion of enterprise value. It’s what’s next that could make the company so interesting.
It is taking the lead in autonomous driving. It could also replace FeDex, UPS, DHL, and the US post office by offering same day deliveries at a fraction of the overnight cost.
It is already doing this now with Uber Foods which offers immediate delivery of takeouts (click here if you want lunch by the time you finish reading this piece.)
UberCopters anyone? Yes, it’s already being offered in France and Brazil.
Uber has the potential to be so much more if it can just outlive its initial growing pains.
It is a classic case of the founder being a terrible manager, as Travis Kalanick has lurched from one controversy to the next. The board finally decided he should spend much time on his new custom built 350-foot boat.
Its “bro” culture is notorious, even in Silicon Valley.
It is also getting enormous pushback from regulators everywhere protecting entrenched local interests. It has lost its license in London, the only place in the world that offered a decent taxi service pre-Uber. Its drivers are getting beaten up in Paris.
However, if it takes advantage of only a few of the doors open to it, status as a FANG beckons.
Walmart (WMT)
A few years ago, I was heavily criticized for pointing out that half the employees at my local Walmart (WMT) were missing their front teeth. They have since received a $2 an hour’s pay raise, but the teeth are still missing. They don’t earn enough money to get them fixed.
The company is the epitome of bricks and mortar in a digital world with 12,000 stores in 28 countries. It is the largest private employer in the US, with 1.4 million workers, mostly earning minimum wage.
The Walmart customer is the very definition of the term “late adopter.” Many are there only because unlike Amazon, Wal-Mart accepts cash and Food Stamps.
Still, if Walmart can, in any way, crack the online nut, it would be a turbocharger for growth. It moved in this direction with the acquisition of Jet.com for $3 billion, a cutting-edge e-commerce firm based in Hoboken, NJ.
However, this remains a work in progress. Online sales account for only 4% of Walmart’s total. But they could only be a few good hires at the top away from success.
Microsoft (MSFT)
Talk about going from being the 800-pound gorilla to an 80 pound one, and then back to 800 pounds.
I don’t know why Microsoft (MSFT) lost its way for 15 years, but it did. Blame Bill Gates’s retirement from active management and his replacement by his co-founder Steve Ballmer.
Since Ballmer’s departure in 2014, the performance of the share price has been meteoric, rising by some 125% over the past two years.
You can thank the new CEO Satya Nadella who brought new vitality to the job and has done a complete 180, taking Microsoft belatedly into the cloud.
Microsoft was never one to take lightly. Windows still powers 90% of the world’s PCs. No company can function without its Office suite of applications (Word, Excel, and PowerPoint). SQL Server and Visual Studio are everywhere.
That’s all great if you want to be a public utility, which Microsoft shareholders don’t.
LinkedIn, the social media platform for professionals, could be monetized to a far greater degree. However, specialization does come at the cost of scalability.
It seems that the future is for Microsoft to go head to head against next door neighbor Amazon (AMZN) for the cloud services market while simultaneously duking it out with Alphabet (GOOGL).
My bet is that all three win.
Airbnb
This is another new app that has immeasurably changed my life for the better. Instead of cramming myself into a hotel suite with a wildly overpriced minibar for $600 a night, I get a whole house for $300 anywhere in the world, with a new local best friend along with it.
Overnight, Airbnb has become the world’s largest hotel chain without actually owning a single hotel. At its latest funding round in 2017, it was valued at $31 billion.
The really tricky part here is for the firm to balance out supply and demand in every city in the world at the same time. It is also not a model that lends itself to vertical integration. But who knows? Maybe priority deals with established hotels are to come.
This is another firm that is battling local regulation, that great barrier to technological innovation. None other than its home town of San Francisco now has strict licensing requirements for renters, a 30 day annual limitation, and a $1,000 a day fine for offenders.
The downtowns of many tourist meccas like Florence, Italy and Paris, France have been completely taken over by Airbnb customers, driving rents up and locals out.
IBM (IBM)
There was a time in my life when IBM was so omnipresent we thought like the Great Pyramids of Egypt it would be there forever. How times change. Even Oracle of Omaha Warren Buffet became so discouraged that he recently dumped the last of his entire five-decade long position.
A recent 20 consecutive quarters of declining profits certainly hasn’t helped Big Blue’s case. It is one of the only big technology companies whose share price has gone virtually nowhere for the past two years.
IBM’s problem is that it stuck with hardware for too long. An entrenched bureaucracy delayed its entry into services and the cloud, the highest growth areas of technology.
Still, with some $80 billion in annual revenues, IBM is not to be dismissed. Its brand value is still immense. It still maintains a market capitalization of $144 billion.
And it has a new toy, Watson, the supercomputer named after the company’s founder, which has great promise, but until now has remained largely an advertising ploy.
If IBM can reinvent itself and get back into the game, it has FANG potential. But for the time being, investors are unimpressed and sitting on their hands.
The Big Telecom Companies
My final entrant in the FANGstakes would be any combination of the four top telecommunication companies, Verizon (VZ), AT&T (T), Comcast (CMCSA), and Time Warner (TWX), which now control a near monopoly in the US.
There is a reason why the administration is blocking the AT&T/Time Warner merger, and it is not because these companies are consistently cited in polls as the most despised in America. They are trying to stop the creation of another hostile FANG.
Still, if any of the big four can somehow get together, the consequences would be enormous. Ownership of the pipes through which the modern economy courses bestows great power on these firms.
And Then….
There is one more FANG possibility that I haven’t mentioned. Somewhere, someplace, there is a pimple-faced kid in a dorm room thinking up a brand-new technology or business model that will take the world by storm and create the next FANG.
Call me crazy, but I have been watching this happen for my entire life.
I want to thank my friend, Scott Galloway, of New York University’s Stern School of Business, for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.
Creating the Next FANG?
While driving back from Lake Tahoe last weekend, I received a call from a dear friend who was in a very foul mood.
Following the advice of another newsletter whose name I won’t mention, he bailed out of all his stocks during the December meltdown. He was promised that Armageddon was coming, and the Dow would collapse all the way to 3,000.
With the Federal Reserve now on a rate easing path, here we are with the major stock indexes just 2.7% short of all-time highs.
Why the hell are stocks still going up?
I paused for a moment as a kid driving a souped up Honda weaved into my lane of Interstate 80, cutting me off. Then I gave my friend my response, which I summarize below:
1) There is nothing else to buy. Complain all you want, but US equities are now one of the world’s highest yielding securities, with a lofty 2.0% dividend.
A staggering 50% of S&P 500 stocks now yield more than US Treasury bonds (TLT). That compares to two thirds of all developed world debt offering negative rates and US Treasuries at a parsimonious 2.48%.
2) Oil prices have bottomed, but remain historically low, and the windfall cost savings are only just being felt around the world. $60 a barrel is a hell of a lot cheaper than $150.
3) While a low Euro (FXE) if definitely eating into large multinational earnings, we are probably approaching the end of the move. The cure for a weak euro is a weak euro. The worst may be behind for US exporters.
4) What follows a collapse in European economic growth? A European recovery powered by a weak currency. European quantitative easing is working.
5) What follows a Japanese economic collapse? A recovery there too, as hyper accelerating QE feeds into the main economy. Japanese stocks are now among the world’s cheapest.
6) While the next move in interest rates will certainly be up, it is not going to move the needle on corporate P&L’s for a very long time. We might see at most two 25 basis point hikes by the end of this cycle, and that probably won’t happen until the second half of 2019. In a deflationary world, there is no room for more.
This will make absolutely no difference to the large number of high growth corporates, like technology firms, that don’t borrow at all because they have enormous cash internal flows.
7) Technology everywhere is accelerating at an immeasurable pace, causing profits to do likewise. You see this in the FANG stocks, where blockbuster earnings reports are becoming as reliable as free upgrades.
Biotech has been on a tear as well.
See the new Alzheimer’s cure? It involves extracting the cells from the brains of alert 95-year old’s, cloning them, and then injecting them into early stage Alzheimer’s patients. I’ve already put myself on the waiting list.
The success rate has been 70%. That one alone could be worth $5 billion a year. I might be a user of this cure myself someday.
8) US companies are still massive buyers of their own stock, some $1 trillion worth this year, and a relaxed repatriation tax law is pouring gasoline on the fire.
This has created a free put option for investors for the most aggressive companies, like Apple (AAPL), Cisco Systems (CSCO), Microsoft (MSFT), IBM (IBM), and Intel (INTC), the top five re-purchasers.
They have nothing else to buy either. (AIG) has mandated the repurchase of an amazing 25% of its outstanding float.
They are jacking up dividend payouts at a frenetic pace as well and are expected to return more than $700 billion in payouts this year.
9) Ignore this at your peril, but China is stimulating their economy like crazy, and it is just a matter of time before that growth spills over to the US.
10) Ditto for the banks, which were dragged down by falling interest rates for most of the last decade. Reverse that trade this year, and you have another major impetus to drive stock indexes higher.
My friend was somewhat set back, dazzled, and nonplussed by my out of consensus comments.
With that, I told my friend I had to hang up, as another kid driving a souped up Shelby Cobra GT 500, obviously stolen, was weaving back and forth in front of me requiring my attention.
Where is a cop when you need them?
Mad Hedge Hot Tips
April 2, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Bitcoin Soars 20% in One Day, to a new one-year high, and algos are to blame. Is this a “fat finger” trade or is there a real end buyer and why? It’s the mystery of the day. Click here.
2) Lyft Craters on Second Day. I guess billion dollar losing companies are not worth so much after all. Avoid (LYFT). Click here.
3) Brexit Vote Fails for the Fourth Time. Prime Minister Theresa May’s career is probably limited to the digits on two hands. Avoid Europe until this is settled. Click here.
4) Tesla Q1 Sales Are Out Today. The consensus is for 64,400 Tesla 3’s, but the numbers are all over the map. Hold your breath. Click here.
5) Boeing Says It Needs More Time, to fix 737 Max software. I took profits yesterday and clocked a nice 13% profit in ten days. On to the next trade. Buy (BA) on the next big dip. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WHAT’S REALLY BEHIND THE BRISTOL MYERS/CELGENE MERGER),
(BMY), (CELG),
(ON EXECUTING MY TRADE ALERTS),
(HOW TO GET CONTROL OF YOUR LIFE)
(GOOGL), (FB), (LYFT)
Global Market Comments
April 2, 2019
Fiat Lux
Featured Trade:
(WHAT’S REALLY BEHIND THE BRISTOL MYERS/CELGENE MERGER),
(BMY), (CELG),
(ON EXECUTING MY TRADE ALERTS),
“At last the lake burst upon us – a noble sheet of blue water . . . walled in by a rim of snow-clad mountain peaks . . . as it lay there with the shadows of the mountains brilliantly photographed upon its still surface I thought it must surely be the fairest picture the whole earth affords,” said the American writer, Mark Twain, on his first sight of Lake Tahoe, pictured below, in 1861.
Mad Hedge Hot Tips
April 1, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) China Rumors Lift Markets. Is this the upside breakout we’ve been looking for? Buy (FXI). Click here.
2) Boeing 737 Max to Stay Grounded Through May, says an internal company memo. The wait is going to be longer than we thought. Still, the stock is up on the news. Sell Southwest (LUV). It will take the biggest hit. Click here.
3) Mad Hedge Hits New All-Time High, up 15.46% year to date, and beating the pants off the Dow Average. Good thing I didn’t buy the bearish argument. There’s too much cash floating around the world. I’m looking to be up 20% within ten days. Click here.
4) Retail Sales Drop 0.20%, in February in another sign of a slowing global economy. Construction spending is also down 0.3%. Try telling that to the stock market today. Click here.
5) China Factory Orders Grow, for the first time in 4 months. Is all their stimulus finally turning around the economy? Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE INMATES ARE RUNNING THE ASYLUM)
(SPY), (TLT), (FCX), (DIS), (TSLA), (IWM),
(GOOGL), (MSFT), (PYPL), (AMZN)
(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)
