May 2019

May 1 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 1 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Your old target for the (SPY) was $292.80; we’re clearly above that now. What’s your new target and how long will it take to get there?

A: My new target on the S&P 500 (SPY) is $296.80. You’re looking at $295 on the (SPY), so we’re almost there. However, we’re grinding up too slowly so I can’t give you an exact date.

Q: Will Fed governor Jay Powell give in to pressure from Trump who wants him to drop rates? Does he have any sway over the process?

A: Officially he has no sway, but every day Trump is tweeting: “I want QE back, I want a 1% rate cut.” And if that happened, the economy would completely blow up—an interest rate cut with the market at an all-time high and 3.25% GDP growth rate would be unprecedented, would deliver a short term gain and long term disaster.

Q: What do you think about the Uber (UBER) IPO?

A: I wouldn’t touch it with a 10-foot pole—they’ve been cutting valuations almost every day. At one point they were going to value the company at $120 billion dollars, now they’re at $90 billion and they may even lower it from there. The last car sharing IPO (LYFT) dropped 33% from its high. I would stay away from all of the IPOs once they’re listed. The rule is: only buy these things when they’re down 50%. Warren Buffet never buys IPOs, nor do I.

Q: What do you think about buying or selling Lyft?

A: I would wait a couple of months for Lyft to find its true price. Then you’ll have something to trade against.

Q: Do you think the bad news is over on Tesla (TSLA)? Is it time to buy? Or is it going bankrupt?

A: The whole world knew that the electric car subsidy would be cut in January, so what customers did was accelerate their orders in the 4th quarter, which took us all the way up to $380 in the shares, and then created a vacuum in the Q1 of this year. It reported the first quarter last week—they were disastrous orders, and the company is cutting back overhead as fast as possible as if it’s going into a recession, which it kind of is. The question is whether or not sales will bounce back in Q2 with the smaller subsidy. I happen to think they will. But we may not see 2018 Q4 sales levels again until 2019 Q4.

Q: Why has healthcare (XLV) been so awful this year?

A: There’s an election next year and both parties promise to beat up on the healthcare industry with drug control pricing and other forms of regulation. Of course, the current president promised free competition in drug prices; but then he moved to Washington DC and found the drug industry lobby, and nothing was ever heard again on that front. It’s a very high political risk sector, but there is some great value at these levels in the healthcare industry in the long term. I’m about to start the Mad Hedge Biotech and Health Care newsletter imminently.

Q: Should I buy the (TLT) $120-$123 call spread now?

A: That's a very aggressive trade, I would wait and go with strikes for in the money, and then only on a big dip. Don’t reach for a trade when the market is at an all-time high.

Q: Should I be shorting Tesla down here?

A: Absolutely not, your short trade was at $380, $350, $330 and $300. Down here, you run the risk of a surprise tweet from Elon Musk causing the stock to go $50 against you. Buy the way, he’s already announced that he’s buying $10 million worth of shares in his next capital raise.

Q: What do you think about CRISPR stocks long term, like Editas Medicine (EDIT), Sangamo Life Sciences (SGMO), and Cellectis (CLLS)?

A: These are probably the best bunch of 10 baggers long term. Short term they are afflicted with the same problems impacting all of healthcare—promises of regulation and price control on all of their products ahead of an election. So, hold for the long term; short term I’d only be buying the really big dips. Did I mention that I’m about to start the Mad Hedge Biotech and Health Care newsletter imminently?

Q: Is your May 10th market top forecast still good?

A: Well we’re getting kind of close to May 10th. I made this prediction based on an inverting yield curve two years ago. However, that target did not anticipate interest rates topping out for the 10-year US Treasury bond at 3.25%. Nor did it consider the Fed canceling all interest rate hikes for the year. Without the artificial stimulus, the market would certainly have already rolled over and died. That said, I still have a week to go.

Q: Should I be selling my long term holds in the FANGS, like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT)?

A: For the long term, no. However, we know from December that these things can get hit with a 40% drawdown at any time. As long as you can handle that, they always bounce back.

Q: What will happen to Venezuela? Any trades?

A: The only related trades would be in the oil market (USO). If we get a coup d’ etat which installs a new pro-American president, which could be at any time, that could lead to a selloff in oil for a couple of days as 1 Million barrels of crude per day come back on the market, but probably no more than that.

Q: With current national debt and budget deficits, when will interest in gold kick in?

A: Very simple: when the stock market goes down, you want to buy gold. It’s the hedge that everyone will chase after, and inflation is just around the corner.

Q: Do you need me to place any Kentucky Derby bets?

A: Me being the cautious guy I am, I pick the horse with the best odds and then I bet him to show. That almost always works.

Q: What about pot stocks?

A: I’ve never liked them very much; after all, how hard is it to grow a weed? The barriers to entry are zero. All of these pot companies coming up now are not really pot stocks as much as they are marketing companies, so you’re buying their distribution capability primarily. That said, I’m having breakfast with the CEO of a major pot company next week, so I’ll be writing about that once I get the inside scoop.

Q: Will the Fed be the non-event?

A: Yes, as stated in the Mad Hedge Hot Tips this morning, it will be a non-event and the news is due out in about an hour.

Quote of the Day - March 3, 2019

Diary, Newsletter, Quote of the Day

"If money be not thy servant, it will be thy master. The covetous man cannot so properly be said to possess wealth, as that may be said to possess him," said Sir Francis Bacon, the 16^th century English scientist.

Mad Hedge Hot Tips for May 2, 2019

Hot Tips

Mad Hedge Hot Tips
May 2, 2019
Fiat Lux

The Five Most Important Things That Happened Today
(and what to do about them)

1) Fed Makes No Move on Rates. Like this was going to be a surprise. 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. Click here.

2) Come Meet John Thomas in Manila, Philippines on June 30. An excellent lunch will be followed by a wide-ranging discussion and an extended question-and-answer period. I’ll be giving you my up to date view on stocks, bonds, currencies, commodities, energy, precious metals, and real estate. To buy tickets, please click here.

3) ISM Factory Orders Dive, in April to 52.8, a six-month low. The global synchronized slowdown is still hurting. Click here.

4) Tesla to Raise $2.3 Billion, and they’ll have no problem getting it. It’s already discounted in the market and could well mark an interim bottom in the shares. Buy (TSLA). Click here.

5) Weekly Jobless Claims Unchanged, at 230,000. The big number comes tomorrow with the April Nonfarm Payroll Report. Click here.

Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:

(HEADED FOR THE LAS VEGAS SKYBRIDGE SALT CONFERENCE),

(BRK/A), (EEM),

(NOTICE TO MILITARY SUBSCRIBERS),

(APPLE’S HOME RUN),

(AAPL), (CRM), (GOOGL)

May 2, 2019 - MDT Pro Tips A.M.

MDT Alert

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

May 2, 2019

Diary, Newsletter, Summary

Global Market Comments
May 2, 2019
Fiat Lux

Featured Trade:

(HEADED FOR THE LAS VEGAS SKYBRIDGE SALT CONFERENCE),
(BRK/A), (EEM)
(NOTICE TO MILITARY SUBSCRIBERS),

May 2, 2019

Tech Letter

Mad Hedge Technology Letter
May 2, 2019
Fiat Lux

Featured Trade:

(APPLE’S HOME RUN)
(AAPL), (CRM), (GOOGL)

Headed for the Las Vegas SALT Conference

Diary, Newsletter

I have packed up four Brioni suites, three pairs of alligator skin loafers, two pair of black socks, and my lucky rabbit’s foot.

Yes, I am headed to Las Vegas to attend the Skybridge SALT conference otherwise known as the Woodstock of hedge fund managers, during May 7-10.

It will be a long week. I’ll be getting up every morning at 5:00 AM to write Mad Hedge Hot Tips, posting my daily Global Trading Dispatch, keeping a close eye on the model trading portfolios for Global Trading Dispatch and the Mad Hedge Technology Letter, interviewing the high and the mighty, and partying until 2:00AM. If you accused me of not acting my age of 67 years, you’d be absolutely right. But then who want to be 67?

In the warm-up to the event, I managed to catch a few minutes on Skype with my old friend and fellow paisano, Anthony Scaramucci.

I asked Anthony Scaramucci, CEO and founder of Skybridge Capital, why we should attend his upcoming SALT conference point blank.

“It’s going to be exciting,” he said.

“How exciting?” I enquired.

“I’ve invited former White House chief of staff general John F. Kelley to be my keynote speaker.” General Kelley, another old friend from my Marine Corps. days, fired Anthony after only eight days on the job as Donald Trump’s Press Secretary.

“That’s pretty exciting,” I responded. “Humble too.”

This was the answer that convinced me to attend the May 7-10 SkyBridge Alternative asset management conference (SALT) at the Las Vegas Bellagio Hotel. You all know the Bellagio. That is the casino that was robbed in the iconic movie Oceans 11.

That is not all Scaramucci had to offer about the upcoming event, known to his friends since his college days as “The Mooch”.

Among the other headline speakers are former UN ambassador Nikki Haley, AOL Time Warner founder Steve Case, artificial intelligence guru Dr. Kai-fu Lee who I have written about earlier, and Carlyle Group cofounder David Rubenstein.

SALT will give seasoned investors to update themselves on the hundreds of alternative investment strategies now in play in the market, raise or allocate money, meet fascinating people, and just plain have fun. Some SkyBridge services accept client investments as little as $25,000. Their end of conference party is legendary.

SkyBridge is led by Co-Managing Partners Anthony Scaramucci and Raymond Nolte. Ray serves as the Firm’s Chief Investment Officer and Chairman of the Portfolio Allocation and Manager Selection Committees. Anthony focuses on strategic planning and marketing efforts.

While I had “The Mooch” on the phone, I managed to get him to give me his 30,000-foot view of the seminal events affecting markets today.

The proliferation of exchange traded funds and algorithms will end in tears. There are now more listed ETFs than listed stocks, over 3,500.

The normalizing of interest rates is unsustainable, which have been artificially low for ten years now. One rise too many and it will crash the market. The next quarter point rise could be the stick breaks the camel’s back (an appropriate metaphor for a desert investment conference).

However, rising rates are good for hedge funds as they present more trading opportunities and openings for relative outperformance, or “alpha.”

There has been a wholesale retreat of investment capital from the markets, at least $300 billion in recent years. The end result will be much high volatility when markets fall, as we all saw in the Q4 meltdown. Until this structural weakness has been obscured by ultra-low interest rates. The good news is that banks are now so over capitalized that they will not be at risk during the next financial crisis.

Ever the contrarian and iconoclast, Scaramucci currently has no positions in technology stocks. He believes the sector has run too far too fast after its meteoric 2 ½ year outperformance and is overdue for a rest. Earnings need to catch up with prices and multiples.

What is Anthony’s one favorite must buy stock today? Berkshire Hathaway (BRK/A) run by Oracle of Omaha Warren Buffet, which is almost a guarantee to outperform the market. Scaramucci has owned the shares in one form or another for over 25 years.

While emerging markets (EEM) are currently the flavor of the day, Anthony won’t touch them either. The accounting standards and lack of rule of law are way too lax for his own high investment standards.

SkyBridge is avoiding the 220 IPOs this year, which could total $700 billion. Many of these are overhyped with unproven business models and inexperienced management. The $100 billion in cash they actually take out of the market won’t be enough to crash it.

SkyBridge Capital is a global alternative investment firm with $9.2 billion in assets under management or advisement (as of January 31, 2019). The firm offers hedge fund investing solutions that address a wide range of market participants from individual investors to large institutions.

SkyBridge takes a high-conviction approach to alpha generation, expressed through a thematic and opportunistic investment style. The firm manages multi-strategy funds of hedge funds and customized separate account portfolios, and provides hedge fund advisory services. SkyBridge also produces a large annual conference in the U.S. and Asia known as the SkyBridge Alternatives Conference (SALT).

Finally, I asked Anthony if he were king of the world, what change would he make to the US today? “If I could wave a magic wand, I would reduce partisanship,” he replied. “It prevents us from being our best.” Will he ever go back into politics again? “Never say never,” he shot back wistfully.

With that, I promised to give him a hug the next time I see him in Vegas, which I have been visiting myself since 1955 during the rat pack days.

To learn more about SkyBridge please visit their website at http://www.skybridge.com

To obtain details about the upcoming May 7-10 SALT conference at the Bellagio Hotel in Las Vegas, please visit the website at https://www.salt.org. Better get a move on. Their discount pricing for the event ends on March 15. Institutional Investors are invited free of charge.

Notice to Military Subscribers

Diary, Newsletter, Research

To the dozens of subscribers in Afghanistan, Somalia, Iraq, Syria, and the surrounding ships at sea, thank you for your service!

I think it is very wise to use your free time to read my letter and learn about financial markets in preparation for an entry into the financial services when you muster out.

And if Donald Trump gets his way with a 10% rise in defense spending and a 30% cut in the State Department budget, it looks like there are going to be a lot more of you abroad to take advantage of my services.

Nobody is going to call you a baby killer and shun you, as they did when I returned from Southeast Asia four decades ago. In fact, employers have been given fantastic tax breaks and other incentives to hire you.

I have but one request. No more subscriptions with .mil addresses, please. The Defense Department, the CIA, the NSA, Homeland Security, and the FBI do not look kindly on private newsletters entering the military network, even the investment kind.

If you think civilian spam filters are tough, watch out for the military kind! And no, I promise that there are no secret messages embedded with the stock tips. “BUY” really does mean “BUY.” “Sell” means “Sell” too.

If I did not know the higher ups at these agencies, as well as the Joints Chiefs of Staff, I might be bouncing off the walls in a cell at Guantanamo by now wearing an orange jumpsuit.

It also helps that many of the mid-level officers at these organizations have made a fortune with their meager government retirement funds following my advice. All I can say is that if the Baghdad Stock Exchange ever become liquid, I'm going to own it.

Where would you guess the greatest concentration of readers The Diary of a Mad Hedge Fund Trader is found? New York? Nope. London? Wrong. Chicago? Not even close.

Try a ten-mile radius centered on Langley, Virginia, by a large margin.

The funny thing is, half of the subscribing names coming in are Russian. I haven't quite figured that one out yet.

Did we hire the entire KGB at the end of the cold war? If we did, it was a great move. Those guys were good. That includes you, Yuri.

So, keep up the good work, and fight the good fight. But please, only subscribe to my letter with personal Gmail, Yahoo, or Hotmail addresses. That way my life can become a lot more boring.

Oh, and by the way, Langley, you're behind on your bill. Please pay up, pronto, and I don't want to hear whining about any damn budget cuts!

I Want My Mad Hedge Fund Trader!

Apple's Home Run

Tech Letter

The company that Steve Jobs built is an earnings thoroughbred with money growing out of their ears.

Apple’s earnings report was real confirmation that Apple’s pivot into a services company is overshadowing its drop in iPhone revenue.

They even elevated forward guidance for next quarter.

Being an economic bellwether that it is, the earnings success could point to more bullish momentum for not only the tech sector but the broader market.

The tech strength showing up in the squiggly figures of the sector’s earnings report indicates that the expected earnings recession will be more of a pause rather than a dip that was first expected.

The next bout of bullish strength that permeates through the market will take many tech stocks to higher highs.

The numbers backed up this premise with Q2 2018 revenue from the services category comprising 20% of total revenue in Q2 2019—a rubber stamp of confidence that this isn’t a false dawn after service sales only comprised of 16% of total revenue the prior year.

The death of the smartphone is upon us with most people who can afford a premium one already using one as we speak with no intentions for a quick refresh.

Apple’s strategy of selling expensive iPhones to Chinese nationals is over with iPhone sales getting slaughtered by 17% to about $31 billion—an accelerated decline for a product that has been hamstrung by smartphone rivals in China offering better phones for lower prices.

The $11.5 billion from its services division and the end result of registering revenue in the high end of its $55-59 billion projection for the quarter is a stark shift from the underperformance of 2018 when Chinese iPhones sales were so bad that they stopped reporting the segment altogether.

The $58 billion of quarterly revenue was still a drop of 5% YOY which included $31 billion in iPhone sales, a shell of its former self when they generated $37.5 billion in iPhone sales the same quarter in 2018.

The disruption in handing off the baton to the services brigade caused outsized ructions inside the company causing the stock to plummet 20% last winter.

Wearables put the cherry on top of the sundae expanding at a rate close to 50% during the quarter with AirPods and Apple Watch leading the charge as best sellers.

Apple plans to inject $75 billion on share repurchases and it also approved a 75-cent dividend per share, a 5% increase.

These repurchases could boost Apple’s stock by up to 7% per year offering investors another compelling reason to hold this stock long-term.

The upgraded dimensions of Apple’s business model could finally give investors peace of mind as they wean themselves from Chinese iPhone sales.

Moving forward, the relationship between American tech and the Chinese consumer will be contentious at best, and battling with Huawei on its turf is not a sensible strategy.

Highlighting this weakness were the Greater Chinese revenue registering only $10.2 billion in sales, down from the Q2 2018 tally of $13 billion.

On the positive side, the Chinese weakness is already baked into the pastry ceding way for the services narrative to move to the forefront.

Generating more incremental revenue from its existing base of 1.4 billion Apple accounts is the order of the day.

I initially believed Apple would make major headway in the services segment and foresaw services composing about 25% of total revenue.

However, I didn’t believe they would be able to achieve this for a few years, and the surprise to investors is the velocity of change to the upside in its services business.

Adding the new magazine subscription for $9.99 to its platform is another feather in their cap even though it doesn’t transform the industry.

Respondents to emarketer.com made it widely known that Apple as a platform was the second most important platform for news publishers behind Google offering a great opportunity to carve out more income from their new news app.

Apple is still in dire need of attractive video options for its content basket and assets on the market are plenty from live sports, shows, movies, and video games.

My money would be on Cook to prefer video games as a viable growth driver because it resonates deeply with younger audiences from abroad and avoids the polarity of controversial content which societies are increasingly sensitive to.

Another option would be to dive headfirst into the enterprise software business moving towards a Salesforce (CRM) model selecting cloud companies à la carte to integrate into a business cloud.

Many Apple device holders already wield their devices for their own online businesses, and this would represent a solid growth driver if they could make their services more business-friendly.

What can we expect moving forward?

In short, less iPhone sales and more service revenue as a proportion of total revenue.

If Apple can carefully choreograph its downshift of iPhones sales that doesn’t destroy overall revenue and profitability, they will successfully manage in transforming the company into a hybrid service company.

I believe that Apple’s services will contribute around 30% of total revenue by 2020 and this is a big deal that will buoy the stock.

Ultimately, these are happier times for Apple as their bet on services isn’t getting bogged down, eclipsing expectations, and will cement their status as a sure-fire $1 trillion market cap company.

Bravo!

May 2, 2019 - Quote of the Day

Tech Letter

“I think the iPhone is the best consumer product ever. That's what I feel about it. And it's become so integrated and integral to our lives, you wouldn't think about leaving home without it.” – CEO of Apple Tim Cook