Global Market Comments
May 7, 2019
Fiat Lux
Featured Trade:
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL)
(THE CODER BOOM)
Mad Hedge Technology Letter
May 7, 2019
Fiat Lux
Featured Trade:
(THE LURKING DANGERS BEHIND FACEBOOK)
(FB), (WFC), (NFLX)
The current business model of social media is dead, and the future model seems in doubt – that was the take away from world's largest social media platform at F8 that I attended, its annual developer conference.
Co-founder and CEO Facebook (FB) Mark Zuckerberg stated at the event that “in our digital lives, we also need both public and private spaces,” an impromptu call to action to migrate users into a new private digital world with Facebook dictating the terms.
The sushi must really be hitting the fan for Zuckerberg to announce his future vision of social media, and the writing is on the wall for his current social media experiment, that is, if he continues along at the same rate.
The projected $5 billion fine incurred by Facebook from the Federal Trade Commission over its privacy handling of personal data is peanuts for the social media company, but this could be the first of numerous fines doled out by regional and national regulatory bureaus that span from the Bay Area to Vietnam.
Facebook is a company that made over $55 billion in revenue last year and the $5 billion would amount to less than 10% of annual sales.
From that $55 billion, Facebook earned profits of over $22 billion, and this $22 billion is what the regulatory battles are about, along with the co-founder’s tenacious defense of deploying his users as free content.
The firm has continued to post operating margins of over 40% and delivered margins of 46% last quarter, a sequential rise of 4% in Q4 2018.
The Oracle of Omaha better known as Warren Buffet cited necessitating accountability for CEOs that drive a company into a government bailout especially banks.
He advocated that these executives and their spouses should be stripped of their net worth if they damage shareholder value.
The comments were directed at the way Wells Fargo’s (WFC) former CEO Tim Sloan crippled Wells Fargo and has since been sidelined during the long bull market in equities.
At some point, Zuckerberg could confront similar ructions because of his efforts at perverting democracy that has caused innumerable damage to American democracy and global society, and I am certain his legion of lawyers are already hatching a plan to tackle this thorny predicament.
If you ponder about his announcement in a zero-sum environment, it makes no sense for Facebook to pivot to “private” messages.
This leads me to believe his words are smoke and mirrors so that Facebook can perpetuate its duopoly and force digital ad players to continue to drink from the same Kool-Aid.
As before, Zuckerberg still believes this game of cat and mouse is a half-baked marketing fix.
This is why many of his trusted disciples such as former executive Chris Cox left under a shroud of mystery citing “artistic differences” in terminating his tenure at Facebook.
It is clear to many that Facebook is barreling straight into an even more frightening future.
What does the announcement mean from a business perspective?
Zuckerberg will continue to purge anyone that disagrees with him, even trusted lieutenants, and continue to integrate the family of apps into one big platform that includes Facebook, Instagram, and WhatsApp messenger.
These three will become one and thus, Zuckerberg’s ad machine rolls on like the dystopian action film Mad Max.
Let me remind you, these drastic measures boil down to Facebook doing everything they can to keep content costs down.
If they, for example, have to go the same route as Netflix (NFLX) - overpaying for the best actors and directors to generate premium content, the stock would halve the next day.
And that is what Zuckerberg is desperately hoping to avoid after the 30% dip in shares in 2018 because of regulatory headwinds.
Combining the three apps would be impossible to regulate at a time that regulation is rearing its ugly head.
Zuckerberg is intentionally upping the ante and accruing more risk in the hope that Facebook can outmuscle its way through in one piece.
The ad industry is crying out for something new, but as long as Zuckerberg’s claws are firmly into the meat of the digital ad budgets for most companies, he gets to decide how the industry develops because he knows the ad dollars will stick.
In the future, your private chats won’t be private because Zuckerberg will be mining the data for ad dollar revenue.
No matter what he says, nothing will change unless Facebook goes in an entirely new direction which would inhibit sales.
Until the fines become material, let’s say 70% of annual revenue or something of that nature, a $5 billion hit to the bottom line will not persuade the management to transform their practices.
Expect less privacy, and WhatsApp and Instagram to be heavily monetized through ad promotion and data mining even though Zuckerberg pledging his company won’t hold user data “longer than necessary.”
As for Facebook itself, Zuckerberg can’t throw his baby out with the bathwater and will hope to minimize its deceleration by bundling it with the growth trajectory of WhatsApp and Instagram.
Instead of major structural changes, Zuckerberg continues to beat around the bush saying, “You should expect that we’re not going to store your data in countries where there's weak data protection.”
This is not the crux of the problem and shows Zuckerberg is still paying lip service and not ponying up to reality.
Attaching Facebook and its dying model is not an attractive strategy leading to a slew of executive resignations.
I believe this could all end in calamity for Zuckerberg as he figures piling on more risk onto the elevated risk levels is the right decision making Warren Buffet’s point for him about CEO’s accountability.
Should Zuckerberg refund shareholders if his flight turns into a suicide mission then claims to be an unwitting victim?
And how does he even refund democracy with his apps causing major unrest to society such as killings that occur because of the distribution of fake news on his platforms?
Making a hot potato hotter might work for the short term and if ad dollars stream into WhatsApp and Instagram, Zuckerberg will claim victory.
But at some point, the potato will scald his hands so bad that it will drop.
Your private chats will be the content at the fulcrum of his data broker empire since his “digital town square” approach isn’t working anymore.
The company is utterly incentivized to figure out how to continue this ad revenue carnival because 93% of total revenue last quarter came from digital ads which is up from the prior year when it constituted 89%.
It all sounds like a big brother apocalyptical novel, which we are in, scarily, in putting out this dialogue before the firestorm starts, Facebook wants to normalize, and front runs the craziness of selling your private chat data before it becomes a national issue.
Will regulators shut this down or will they be naïve and turn a blind eye?
“Our philosophy is that we care about people first.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Hot Tips
May 6, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) The China Trade War Ratchets Up, with Trump imposing 25% tariffs on $200 billion more in imports. It seems that the negotiations were not going as well as advertised. The stock market won’t like this one bit. The heat in the kitchen is getting too hot. The headline should read “25% tax to hit US consumers.” Going to 100% cash. Click Here.
2) Preview of the Next Correction or Bear Market. Watch what’s going down today and you have a preview of the next correction or bear market. Lead that led the upside will lead the downside too, with NASDAQ opening down 200 points this morning.
3) Softbank to Raise $100 Billion in Vision Fund IPO. It may be a pipe dream but if Masayoshi Son pulls it off stocks will REALLY get expensive. And can you squeeze another $100 billion into the San Francisco Bay Area? Me thinks not. Click Here
4) Uber to Go Public This Week, likely at a $90 billion valuation which will suck $10 billion out of the market. The question is, what other stocks will people sell to get a piece of the biggest ride sharing company? Click Here
5) More Trouble for Boeing. Pilots say Boeing knew about software troubles for a year before the crash. Wait for a bigger dip to buy (BA). Click Here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE’S ANOTHER BOMBSHELL),
(DIS), (QQQ), (AAPL), (INTU), (GOOGL), (LYFT), (UBER)
(PAYPAL GOES FROM STRENGTH TO STRENGTH)
(PYPL), (SQ), (GOOGL), (LYFT)
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a 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
May 6, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE’S ANOTHER BOMBSHELL),
(DIS), (QQQ), (AAPL), (INTU), (GOOGL), (LYFT), (UBER), (FCX))
I was all ready to write this week that massive monetary stimulus created by the Federal Reserve will cause the stock market to continue its slow-motion melt up.
The president had other ideas.
As of this writing, the US will impose without warning a surprise 25% increase in tariffs on $200 billion worth of Chinese imports, effective Friday, or in four days.
Clearly, the trade negotiations are not going as well as advertised by the administration. My bet is that the stock market won’t like this. All I can say is that I’m glad I’m 90% in cash and 10% in a Walt Disney vertical bull call spread that expires in nine trading days.
The bigger and unanswerable question is whether this is just a negotiating strategy already well known by the Bronx Housing Authority that sets up a nice dip to buy? Or is it this the beginning of a long overdue summer correction?
Nobody knows.
Certainly, the rally was getting long in the tooth, rising almost every day in 2019, with NASDAQ reaching new all-time highs. Those who kept their big-cap technology stock through the sturm und drang of the December meltdown have been rewarded handsomely. Index players reigned supreme.
However, we live in unprecedented times. Never before has a stock market received this much artificial stimulus at an all-time high unless you hark back to the Tokyo 1989 top. Japanese shares are now trading at 43% lower than that high….30 years later. We all know that our own decade-old bull market will eventually end in tears, but will it be in days, weeks, months, or years?
I had plenty of great wisdom, wonderful sector selections, colorful witticisms, and killer stock picks to serve up to you this week, but they have all be outrun by events. There’s nothing to do now but wait and see how the market responds to this tariff bombshell at the Monday morning opening.
After three months of decidedly mixed data, the information flow on the economy suddenly swung decidedly to the positive. The jobs data could have been more positive.
Of course, the April Nonfarm Payroll Report was a sight to behold. It came in at 263,000, about 80,000 more than expected, and more than makes up for last month’s dismal showing. It was a bull’s dream come true. This is what overheating looks like fueled by massive borrowing. Play now, pay later.
The headline Unemployment Rate fell a hefty 0.2% to 3.6%, the most since 1969 when the Vietnam War was raging, and the economy was booming. I remember then that Levi Strauss (LEVI) was suffering from a denim shortage then because so much was being sent to Southeast Asia to use as waterproof tarps. Wages rose 3.2% YOY.
Professional and Business Services led at a massive 76,000 jobs, Construction by 33,000 jobs, and Health Care by 27,000 jobs. Retail lost 12,000 jobs.
The ADP came in at a hot 275,000 as the private hiring binge continues. Then the April Nonfarm Payroll Report blew it away at 263,000. The headline unemployment rate plunged to a new 49-year low at 3.6%.
Consumer Spending hit a decade high, up 0.9% in March while inflation barely moved. Is Goldilocks about to become a senior citizen?
Apple (AAPL) blew it away with a major earnings upside surprise. The services play is finally feeding into profits. Stock buybacks were bumped up from $100 billion to $150 billion. Don’t touch (AAPL) up here with the stock just short of an all-time high. How high will the shares be when Apple’s revenue split between hardware and software revenues is 50/50?
Pending Home Sales jumped 3.8% on a signed contract basis. No doubt the market is responding to the biggest drop on mortgage rates in a decade. At one point, the 30-year fixed rate loan fell as low as 4.03%. Avoid housing for now, it’s still in a recession.
Topping it all off, the Fed made no move on interest rates. Like this was going to be a surprise? This may be the mantra for the rest of 2019. The big revelation that the Fed will start ending quantitative tightening now and not wait until September, as indicated earlier. More rocket fuel for the stock market. Let the bubble continue.
Uber (UBER) hit the Road for its IPO with valuations being cut daily, from a high of $120 billion to a recent low of $90 billion. The issue goes public on Friday morning. Rival Lyft (LYFT) definitely peed on their parade with their ill-fated IPO plunging 33%.
It wasn’t all Champaign and roses. San Francisco home prices fell for the first time in seven years. The median price is now only $830,000, down 0.1% YOY. Back up the truck! Clearly a victim of the Trump tax bill, this market won’t recover until deductions for taxes are restored. That may take place in two years….or never!
The Mad Hedge Fund Trader suffered a modest setback with the sudden collapse of copper prices last week, thus giving up all its profit in Freeport McMoRan (FCX). Global Trading Dispatch closed the week up 14.48% year to date and is down -1.48% so far in May. My trailing one-year retreated to +18.85%.
Reflecting the huge sector divergence in the market, the Mad Hedge Technology Letter leaped to another new all-time high on the back of two new very short-term positions in Intuit (INTU) and Google (GOOG), which we picked up after the earnings debacle there. Some 11 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.
My nine and a half year profit shrank to +314.62%. The average annualized return backed off to +33.11%. With the markets at all-time highs and my Mad Hedge Market Timing Index forming a 2 ½ month high, I am now 90% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.
The coming week will be pretty boring after last week’s excitement, at least on the hard data front.
On Monday, May 6, Occidental Petroleum (OXY), now engaged in a ferocious takeover battle for Anadarko, reports. So does (AIG).
On Tuesday, May 7, 3:00 PM EST, we obtain March Consumer Credit. (LYFT), one of the worst performing IPOs this year, gives its first ever earnings report.
On Wednesday, May 8 at 2:00 PM, we get the most important earnings report of the week with Walt Disney (DIS), along with (ROKU).
On Thursday, May 9 at 8:30 the Weekly Jobless Claims are produced. At the same time, we get the March Producer Price Index. Dropbox (DBX) reports.
On Friday, May 10 at 8:30 AM, we get the Consumer Price Index. The Baker-Hughes Rig Count follows at 1:00 PM. (UBER)’s IPO will be priced at the opening. Viacom (VIA) Reports.
As for me, I’ll be watching the Kentucky Derby on Saturday. The field is wide open, now that the favorite, Omaha Beach, has been scratched.
As I will be attending the Las Vegas SALT conference during the coming week, the Woodstock of hedge fund managers, I will take the opportunity to rerun some of my oldies but goodies. We also have recently enjoyed a large number of new subscribers so I will be publishing several basic training pieces.
Maybe it was something I said?
For more on the SALT conference, please click here (you must be logged in to your account to access this piece).
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“If the product is free, then you are the product,” said a technology company CEO to me the other day.
