Mad Hedge Technology Letter
May 29, 2019
Fiat Lux
Featured Trade:
(CHINA TO BAN FEDEX)
(HUAWEI), (AMZN), (FDX), (UPS), (DPSGY), (BABA), (ZTO)
Mad Hedge Technology Letter
May 29, 2019
Fiat Lux
Featured Trade:
(CHINA TO BAN FEDEX)
(HUAWEI), (AMZN), (FDX), (UPS), (DPSGY), (BABA), (ZTO)
Sell any and all rallies in FedEx (FDX) – that’s my quick takeaway from the Chinese communist party publishing a sharp retort to their de-facto mouthpiece of a publication called the Global Times signaling FedEx’s imminent demise in greater China.
The Global Times is often used as thinly veiled statements to a wider global audience and mimics the ideology of the ruling communist party and their main positions on critical issues.
As regards to FedEx’s business in China, it said:
“There are rising calls for China's postal service regulator to cut off FedEx from China market, as Huawei has accused the US express courier of diverting and rerouting its packages.”
FedEx is crushing the Chinese logistics market currently and is the go-to carrier holding firm at 54.6% market share.
They have been around in China for as long as the economic boom has percolated inside the mainland from 1984, far before any of its local competitors were even up and running by a decade or two.
FedEx’s latest acquisition of Dutch-based TNT Express in 2016 solidified its dominance.
Foreign competition is a mainstay of international shipping patterns in China with the top three rounded out by DHL (DPSGY) with a 25.07% market share and United Parcel Service (UPS) with a 16.94% market share.
If these assertive claims do result in FedEx meaningfully losing China revenue, UPS wouldn’t stand to pick up the leftovers and could be put out to pasture by the same issue of hailing from a country that has an active adversarial economic policy against China’s.
If anyone would benefit, it would by DHL, given that Germany has a far less hawkish stance towards China, and they are unwilling to bite off the hand that feeds them.
The current situation is a concerning sign for the future of Germany as an industrial power and ability to sustain itself against China Inc.
It could be somewhat true that Germany has overextended themselves and only time, Made in China 2025 project, and the mood of the Chinese communist party can delay the inevitability of full tech hegemony over their western European counterpart.
The communist party could choose to just bypass DHL altogether and kick out all foreign invaders gifting courier responsibilities to Alibaba-based (BABA) subsidiaries and the likes of ZTO Express (ZTO) who provide express delivery and other value-added logistics services in China.
DHL will hope that China delays any draconian measures and pray that its active partnership with a local logistic firm has real legs.
DHL's revenue sharing agreement with SF Express does not preclude them from the anger of Chinese regulators, but the risk of Chinese regulators favoring local couriers has risen another 25%.
Playing by the rules goes a long way in China, even if they change every day, and for customers across DHL’s target audience of industries including technology, health care, retail, automotive, and e-commerce.
DHL CEO Frank Appel said, "Combined with our global operations standards and network support, the agreement provides a solid foundation to continue exploring further opportunities in China in the coming years."
From an outside perspective, this sounds more like forced cooperation with forced technology transfers with the mainland companies slurping up Germany tech knowhow.
Doing a deal with the devil for access to a 1.3 billion customer market is being put through the ringer.
When I view the snippets through the lens of geopolitics, it’s hard to believe that at such a sensitive time, FedEx would actively “reroute” packages and knowingly approved this behavior, they simply can’t be that clumsy.
The situation smells like an overt show of nationalism by a group of individuals, and it questions the longevity of FedEx operating in China all the same.
FedEx promptly responded confessing:
“We regret that this isolated number of Huawei packages were inadvertently misrouted.”
An unintentional mistake offered a golden opportunity to tie the logistics company to the U.S. government’s aggressive nature and going forward FedEx will remain in a shroud of mystery until investors can get further grips on the rates of growth of their Chinese operations.
If FedEx were afraid about this, then they must be tearing their hair out about the domestic behemoth that is Amazon (AMZN) and their desires to install a full-service logistic service to blanket FedEx from e-commerce deliveries.
This has been the initial premise of my short call on FedEx, which has proved correct, and the regulatory nightmare in China will cast another cloud around its business.
Any strength in FedEx shares will be met with a cascade of selling activity, and as the economy slows down because of tariff-induced headwinds, this is a stock to outright short.
Back to China, FedEx slashed its full-year profit forecast for the second time in three months after reporting weaker-than-expected third quarter earnings.
The Chinese economy is absolutely slowing down, and its effects are impacting surrounding Asian nations.
Manufacturing cuts will cause the number of courier packages to slide in China and there is no telling how bad this trade stand-off could get.
It doesn’t look good for FedEx, and I reiterate my short stance on the company.
Those of you counting on getting your old union assembly line job back in Detroit can forget it.
The eight-year forecast published by the Bureau of Labor Statistics shows that 4.19 million jobs will be gained in the U.S. in professional and business services, followed by 4 million health care and social assistance jobs, while 1.2 million will be lost in manufacturing.
This is great news for website designers, Internet entrepreneurs, registered nurses, and masseuses in California, but grim tidings for traditional metal bashers in the rust belt manufacturing states such as Michigan, Indiana, and Ohio.
I’m so old now that I am no longer asked for a driver’s license to get into a nightclub. Instead, they ask for carbon dating.
The real challenge for us aged career advisors is that probably half of these new service jobs haven’t even been invented yet, and if they can be described, it is only in a cheesy science fiction paperback with a half-dressed blond on the front cover.
After all, who heard of a webmaster, a cell phone contract sales person, or a blogger 40 years ago?
Where are all these jobs going to? You guessed it, China, which by my calculation has imported 25 million jobs from the U.S. over the past decade.
You can also blame other lower waged, upstream manufacturing countries such as Vietnam, where the Middle Kingdom is increasingly subcontracting its own offshoring.
These forecasts may be optimistic because they assume that Americans can continue to claw their way up the value chain in the global economy, and not get stuck along the way, as the Japanese did in the 90s.
The U.S. desperately needs no less than 27 million new jobs to soak up natural population and immigration growth and get us back to a traditional 5% unemployment rate.
The only way that is going to happen is for America to invent something new, big, and fast.
Personal computers achieved this during the 80s, and the Internet did the trick in the 90s. The fact that we’ve done squat since 2000 but create a giant paper chase of subprime loans and derivatives explains why job growth since then has been zero, real wage growth has been negative, and American standards of living are falling.
While the current crop of politicians extols the virtues of education, the reality is that we are dumbing down our public education system. How do we invent the next “new” thing, while shrinking the University of California’s budget by 25% two years in a row?
If my local high school can’t afford new computers, how is it going to feed Silicon Valley with a computer literate workforce? The U.S. has a “Michael Jackson” economy. It’s still living like a rock star but hasn’t had a hit in 20 years.
China can have all the $20 a day jobs it wants. But if it accelerates its move up the value chain as it clearly aspires to do, then America is in for even harder times.
I’ll be hoping for the best but preparing for the worst. How do you say “unemployment check” in Mandarin?
“We can lead, but we cannot carry,” said Mike Ryan, chief investment strategist at UBS, about America’s role in the global economy.
“It must be pointed out that Huawei package incident either shows the incredibly poor quality of FedEx's service or that FedEx is playing a very disgraceful role.” – Said the Global Times of China
Mad Hedge Hot Tips
May 28, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Bond Market Says the Recession is Already Here, with ten-year interest rates at 2.27%, a new 2019 low. German bunds hit negative -0.16%. JP Morgan CEO Jamie Diamond says the trade war could cause real damage to the US economy. Click here.
2) The Bear Market in Home Prices Continues, in March, with the Case Shiller CoreLogic National Home Price Index showing a 3.7% annual price gain, down 0.2%. Home price in San Francisco is posting negative numbers. When will those low-interest rates kick in? Click here.
3) US Capital Goods Fall Out of Bed, in April, down 0.9%, in another important pre-recession indicator. No company with sentient management wants to expand capacity ahead of an economic slowdown. Click here.
4) From Red State to Welfare State, and from farmer to ward of the state. The administration’s $16 billion bailout of the farm states won’t cover a fraction of the damage the trade war has done. Farmers are switching crops not to meet demand but to gain the maximum government payouts. Most would rather work for living and prefer free trade. Click here.
5) Heard at SALT. Decentralization is the next big trend in technology. To move out of Silicon Valley into the rest of the country, you only need a laptop and a broadband connection to start up a new company. Costs are cheaper, and staff is available. That’s what Mark Cuban told me.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
SPECIAL MEMORIAL DAY ISSUE
(A TRIBUTE TO A TRUE VETERAN)
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE COMES THE HEAD AND SHOULDS TOP)
(CHINA’S RARE EARTH WEAPON)
(TSLA), (AAPL), (LMT), (BAESY), (RTN)
Mad Hedge Technology Letter
May 28, 2019
Fiat Lux
Featured Trade:
(CHINA’S RARE EARTH WEAPON)
(TSLA), (AAPL), (LMT), (BAESY), (RTN)
There are many ways to describe the trade war the U.S. administration finds itself in.
Many experts have chimed in too categorizing it as a fight for technological supremacy.
There are many different ways to skin a cat.
I’ll tell you what is really going on.
Above all else, this logjam has more to do with a battle for resources, and more specifically, rare earth elements that power the devices, cars, and gadgets that many westerners have become accustomed to.
Let’s make no bones about it, Beijing has cornered the rare earth’s market spanning from assets in the Congo and the cobalt that is produced there to supply on their own turf forcing the U.S. to be reliant on China for about 85% of its rare earth supply.
In other words, the rare earth industry in China is a large industry that is important to Chinese internal economics.
Rare earths are a group of elements on the periodic table with similar properties.
The elements are also critical to national governments because they are used in the defense industry for top-secret weaponry.
Permanent magnets can be used for several applications including serving as essential components of weapon systems and high-performance aircraft such as drones.
China has touted their own state-owned companies to reach deep into this market and make it their own.
The results are visible to the entire world and China gaining a stranglehold on these valuable inputs will have lasting consequences.
Rare earth metals are made up of 17 elements — lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, scandium, and yttrium.
U.S. companies will need to start developing new supply channels in other markets and Australia could allow U.S. companies' lifelines in securing the orders they need to function as a company.
Military companies important to national security devour these types of precious metals and Raytheon Co (RTN), Lockheed Martin Corp (LMT) and BAE Systems (BAESY) all produce sophisticated missiles with these elements powering their guidance systems, and sensors.
These traded companies’ shares could be in for short-term turbulence if China decides to pull the rug out from underneath banning Chinese companies doing business with American companies, or by slapping on tariffs to respond to the tariffs on Chinese imports.
California's Mountain Pass mine is the sole US rare earth facility with a caveat.
The owner of the mine ships over 50,000 tons of rare earth concentrate for processing in China, meaning that it will be harder than first thought to strip China out of the process.
China and America are in the first stages of a massive decoupling.
Not only smartphone operating systems will be affected with Huawei announcing it will roll out its own in-house operating system after Google announced that they will pull its apps and use of the Android system off of Huawei’s phone, but almost anything of significant value from an Ivy league computer engineering degree to electric cars will be retrenched on each side.
This is terrible news for Tesla (TSLA), and they could be hit next by the Chinese communist party if they deem electric cars integral to national security because of the data and sensors that deliver precious information back to Silicon Valley.
Tesla is in the midst of building a Gigafactory in Shanghai and their growth strategy is solely focused on China.
China standing up to the U.S. is a blunt force way of saying that nobody will dictate to the Chinese their future prospects except themselves.
They feel after 35 years of economic super growth, they should be granted with the options of choosing their destiny.
Huawei will feel the repercussions of these detrimental policies with their European business a big question going forward.
Germany was always a large bullseye for the Chinese government and scooping up robotic centerpiece Kuka, was a smash and grab in broad daylight.
The sleeping giant of Germany has woken up and is on the offensive after allowing the Chinese unfettered access for a generation.
Risks are high in Germany and they could be the first industrial power to be gutted and left behind the woodshed by China Inc and the CCP.
The U.S. faces a conundrum in that the method in which aided China’s rise of forced technology transfers and IP theft can only be stopped if actively removed, meaning we are headed for a game of chicken with the other side hoping the other side blinks first.
The market fallout will be deep and wide-ranging with the most movement in technology companies that are leveraged to China meaning chip companies.
But then there are the tech companies who have deeply embedded interests in China such as Apple (AAPL) whose supply chain is in the eye of the storm with Foxconn.
The worst possible case is China banning the sales of precious earth metals to the U.S. forcing the U.S. to buy from a 3rd party country which in turn would increase costs of American products.
This is what I would categorize as a hard landing and absolute decoupling.
The common denominator of this trade war is higher costs for the American consumer and mass layoffs in China – this is my base case.
However, I would argue that a rare earth's ban would not be as bad as initially thought because many consumers are tapped out with phones, tablets, and computers.
The elongated refresh cycle will not mean consumers will go without access to the internet and its services.
In terms of the stock market, this puts a wet towel on the positive momentum of early spring when the Nasdaq roared higher.
The Nasdaq could be stuck under 8,000 for the summer unless a rapprochement takes place which I would put at 30% for a structural détente and 65% for a kick the can down the road détente.
The ironic unintended consequence is the safe haven trade of buying treasuries has come back in vogue and could be a huge boon for the domestic real estate market.
This extends the bull market in properties at least another six months with lower rates allowing fresh buyers to take advantage of lower financing opportunities amid a bump in inventory.
The bull market absolutely needs the real estate market on-sides to perpetuate because of the fragile nature of this part of the late economic cycle.
I also believe that U.S. President Donald Trump will become even more brazen as stronger economic data stateside suggests he could pile on even more pressure on the Chinese communist party to coerce them into a big win that will aid him in his reelection efforts.
Let’s not forget that much of this has to do with the 2020 road back to the White House.
As it stands, corporate America has finally understood the message of moving their supply chain out of China which means mass layoffs for many Chinese particularly in the southern region around Guangzhou.
This is not a marketing charade, this trade war has teeth.
China’s Central Bank will be forced into dovish policy to help state-owned companies who many are akin to zombie companies and another relic of communism that has yet to be uprooted.
All this means debt, debt, and more debt piling up on the mainland and on American shores.
If you thought this was the time of austerity, then you are truly wrong.
The end game could be a Chinese yuan that drops like a heavy stone through the psychological threshold of $7 and on its way down to $7.50.
If this comes to pass, expect a 10% correction and a demonstrably strong U.S. dollar, Japanese yen, Swiss Franc, and a generational entry points into the equity market.
“Now there is a new long march, and we should make a new start.” – Said Chairman of China Xi Jinping
Global Market Comments
May 28, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE COMES THE HEAD AND SHOULDERS TOP)
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