Mad Hedge Technology Letter
May 20, 2019
Fiat Lux
Featured Trade:
(THE BIG PLAY IN CISCO)
(CSCO), (JNPR), (ANET), (INTC), (GOOGL), (AMZN)
You can’t steal the mojo from the company that sells network software and infrastructure equipment.
Cisco (CSCO) is effectively an indirect bet on people using the internet because companies need the network infrastructure to offer all the cool and useful services that tech provides.
Technology and the services that result from it continues to be at the heart of customer strategy and now more than ever, Cisco’s market-leading portfolio and differentiated innovation are resonating with them as they transform their IT infrastructure.
Cisco is also a fabulous bet on 5G as the most recent technologies like cloud, AI, IoT, and WiFi 6 among others are developing together to revolutionize the way business operates and delivers new experiences for customers and teams.
Cisco is fundamentally changing the way customers approach their technology infrastructure to address the rising complexity in their IT environments.
They have constructed the only integrated multi-domain intent-based architecture with security at the foundation.
This is designed to allow customers to securely connect their users and devices over any network to any application.
Enterprise networks today must be optimized for agility and heightened security, leveraging cloud and wireless capabilities with the ability to extract insights from the data and security integrated throughout.
Cisco is in pole position to deliver this to customers.
Last quarter saw the launch of new platforms expanding the enterprise networking assets with the launch of subscription-based WiFi 6 access points and Catalyst 9600 campus core switches purpose-built for cloud-scale networking.
By combining automation and analytics software with a broad portfolio of switches, access points, and controllers, Cisco is creating a seamless end-to-end wireless first architecture.
With the newest Catalyst 9000 additions, Cisco has completed the most comprehensive enterprise networking portfolio upgrade in their history.
Cisco rebuilt their entire access portfolio with intent-based networking across wired and wireless.
Cisco also now have one unified operating system and policy management platform to drive simplicity and consistency across networks all enabled by a software subscription model.
In the data center, their strategy is to deliver multi-cloud architectures that bring policy and operational consistency no matter where applications or data resides by extending Application Centric Infrastructure (ACI) and offering HyperFlex to the cloud.
According to Cisco’s official website, its HyperFlex product is “a converged infrastructure system that integrates computing, networking and storage resources to increase efficiency and enable centralized management.”
Cisco’s partnerships with Amazon Web Services (AWS), Google Cloud, and Microsoft Azure are great examples of how they continue to work with web-scale providers to deliver new innovation.
Some new additions are Cisco’s cloud ACI for AWS, a service that allows customers to manage and secure applications running in a private data center or in Amazon Web Services cloud environments.
They also expanded agreements with Alphabet (GOOGL) by announcing support for their multi-cloud platform Anthos to help customers build secure applications everywhere from private data centers to public clouds with greater simplicity.
Going forward, Cisco will integrate this platform with its broad data center portfolio, including HyperFlex, ACI, SD-WAN, and Stealthwatch cloud to deliver the best multi-cloud experience.
Organic growth has surpassed 4% for five straight quarters and expanded margins and positive guidance for the current quarter will reaccelerate PE multiples, increasing as more investors buy into the strong narrative.
CEO of Cisco CEO Chuck Robbins boasted on the call that “we see very minimal impact at this point based on all the great work the teams have done, and it is absolutely baked into our guide going forward” when referring to the headwinds of the global trade war.
It’s been quite the new normal for chip firms to guide down for the rest of 2019, and Intel’s (INTC) worries are emblematic of the growing challenges facing the tech industry.
Cisco bucked the trend by issuing strong forward guidance of 4.5% to 6.5% revenue growth in its fiscal fourth quarter, and earnings of 80 cents to 82 cents per share.
In an in-house survey, Cisco found that 11% of respondents have upgraded networking infrastructure and 16% expect to do so in the next 12 months.
The “minimal impact” of the trade war indicates to investors that even with negative tech sentiment brooding around the world, Cisco’s best in class tech infrastructure still cannot be sacrificed and the migration of companies to digital directly benefits Cisco who provides the building blocks for software and hardware tech companies to develop around.
Cisco even felt bold enough to hike prices giving consternation to current customers.
Both Juniper (JNPR) and Arista (ANET), lower quality network infrastructure companies, have indicated their enterprise businesses are growing faster than the overall market and Cisco’s price hike was probably a bad time to up margins in the current frosty climate.
Even more worrying is data that suggests a general Enterprise pause in spending at a minimum and could entrap the broader tech market as many capital expenditures could be put on hold in the late economic cycle.
Keep in mind that Cisco’s Catalyst 9000 line had an abnormally strong last fourth quarter due to brisk adoption accelerating meaning comps will be hard to beat in the next earnings report.
However, these are minor bumps on the road at a time when the major narrative is running smoothly and shows no signs of stopping.
Cisco shares will continue to rise if they continue to upgrade their products and back it up with their best of breed reputation that could spur more price hikes.
Investors should wait for dips to buy in this name until there are any signs of product quality erosion which I believe will not happen in 2019.
“The future of advertising is the Internet.” – Said Founder and Former CEO of Microsoft Bill Gates
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
Mad Hedge Hot Tips
May 17, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) The China Tariffs Deliver the Largest Tax Increase in History, according to US Treasury figures. With Walmart (WMT) already issuing warnings, we should sit up and take notice. Click here.
2) April Housing Starts to Jump, up 5.7%. Permits are also up 0.5%. With the 30-year fixed rate loan down to 2.12%, low rates are having their desired effect. On the other hand, Chinese tariffs are driving costs through the roof. Click here.
3) Wall Street Slammed by Trade Fears. Stocks made back exactly half of their May loss, then faded. I covered my short in bonds for a small profit. The bond market seems to be expecting a recession. Click here.
4) Atlanta Fed Axes Growth Prospects, for Q2, from 3.2% to 1.1%. This trade war is getting expensive. No wonder stocks have been in a swan dive. Click here.
5) Heard at SALT. Don’t put your DNA on the web. Not only will you be denied health insurance, so will all of your future decedents.
Published today in the Mad Hedge Global Trading Dispatch:
(MAY 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(MSFT), (GOOGL), (AAPL), (LMT), (XLV), (EWG), (VIX), (VXX), (BA), (TSLA), (UBER), (LYFT),
(ADBE),
(HOW TO HANDLE THE FRIDAY, MAY 17 OPTIONS EXPIRATION),
(INTU)
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 17, 2019
Fiat Lux
Featured Trade:
(APRIL 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(MSFT), (GOOGL), (AAPL), (LMT), (XLV), (EWG), (VIX), (VXX), (BA), (TSLA), (UBER), (LYFT), (ADBE),
(HOW TO HANDLE THE FRIDAY, MAY 17 OPTIONS EXPIRATION), (INTU),
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 15 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Where are we with Microsoft (MSFT)?
A: I think Microsoft is really trying to bottom here. It’s only giving up $8 from its recent high, that's why I went long yesterday, and you can be hyper-conservative and only do the June $110-$115 vertical bull call spread like I did. That will bring in a 13.68% profit in 28 trading days, which these days is pretty good. This morning would have been a great entry point for that spread if you couldn’t get it yesterday.
Q: How will tariffs affect Apple (AAPL) when they hit?
A: The price of your iPhone goes up $140—that calculation has already been done. All of Apple's iPhones are made in China, something like 220 million a year. There’s no way that can be moved, they need a million people for the production of these phones. It took them 20 years to build that facility and production capacity; it would take them 20 years to move it and it couldn't be done anywhere else in the world. So, that's why Apple led the charge on the downside and that's why it will lead the charge to the upside on any trade war resolution.
Q: How bad is the trade war going to get?
A: The market is betting now by only going down 1,400 Dow points it will be resolved on June 28th in Osaka. If that doesn’t happen it could get a lot worse. It could get down to my down 2,250-point target, and if it continues much beyond that, then we’ll get the whole full 4,500 points and be back at December lows. After that, you’re really looking at a global recession, a global depression, and ultimately nearing 18,000 in Dow, the 2016 low.
Q: Will global trade wars force US Treasuries down to around 2.10% on the ten year?
A: Yes. Again, the question is how bad will it get? If we resolve the trade war in six weeks, treasuries will probably double bottom here at around a 2.33% yield. If we go beyond that, then 2.10% is a chip shot and we go into a real live recession. The truth is no one knows anything, and we really don’t have any influence over what happens.
Q: How will equities digest and increase in European tariffs for cars?
A: It would completely demolish the European economy—especially that of Germany (EWG) which has 50% of its economy dependent on exports (primarily cars) and mostly to the U.S. And if we wipe out our biggest customer, Europe, then that would spill over here very quickly. Anybody who sells to Europe—like all the big Tech companies—would get slaughtered in that situation.
Q: Is it time to buy the Volatility Index (VIX)?
A: It’s too late to buy (VIX) now. I don’t want to touch it until we get down to that $12-$13 handle again because the time decay on this is enormous. Time decay is more than 50% a year, so your timing has to be perfect with trading any (VIX) products, whether it’s the (VXX), the (VIX) futures, the (VIX) options, or so on. There are countless people shorting (VIX) here, and they will short it all the way down to $12 again.
Q: What should I do about Boeing at this point?
A: We went long, got out, took our profit and caught this rally up to $400 a share. Then (BA) gave it up and it broke down. It’s a really tempting long here. Along with Apple, Boeing has the largest value of exports to China of any company. They have orders for hundreds of airlines from China, so they are an easy target, especially if there is a ramp up in the intensity of the trade war. That said, something like a June $270-$300 vertical bull call spread is very tempting, especially with elevated volatility up here, so I’m watching that very closely. We’re looking for the recertification of the 737 MAX bounce which could happen in the next few weeks; if that does happen it should rally at least back up to 380.
Q: Are your moving averages simple or exponential?
A: I just use the simple. I find that the simpler a concept is, the more people can understand it, and the more people buy it; that’s why I always try to keep everything simple and leave the algorithms for the computers.
Q: What stocks are insulated from a US/China trade war?
A: None. When the whole market goes risk off, people sell everything. Remember that an overwhelming portion of the market is now indexed with passive investment funds, so they just go straight risk on/risk off. It makes no difference what the fundamentals are, it makes no difference who has a lot of Chinese business or a little—everyone gets hit and everyone will get boosted when the trade war ends. There is no place to hide except cash, which is why I went 100% cash going into this. People seem to forget that cash has option value and having a lot of cash going into one of these situations is actually worth a lot of money in terms of opportunities.
Q: Do you have any thoughts on Uber’s (UBER) bad performance?
A: Yes, the whole sector was wildly overvalued, but no one knew that until they brought it to market and found out the real supply and demand for the issue. The smartest company of the year has to be Lyft (LYFT), which got a nice valuation by doing their issue first and keeping it small. So, they kind of rained on Uber’s parade; at one point, Uber was down 25% from their IPO price. That’s awful.
Q: Is Trump forcing the Fed to drop rates with all this tariff threat?
A: Yes, and if you remember, Trump really ramped up the attacks on the Fed in December. And my bet is at the first sign the trade talks were in trouble, they wanted to lower rates to offset the hit to the U.S. economy. There was no economic reason to suddenly demand huge interest rate cuts last December other than a falling stock market. The tariffs amount to a $72 billion tax increase on the American consumer, felt mostly at the low end, and that is terrible for the economy in that it reduces purchasing power by exactly that much.
Q: Would you buy the dollar as a safe haven trade?
A: No, I would not. The dollar may actually go down some more, especially with the collapse in our interest rates and European interest rates bottoming at negative levels. The best thing in the world in a high-risk environment like this is cash—don’t try to get clever and buy something you think will outperform. You could be disappointed.
Q: Why is healthcare (XLV) behaving so badly?
A: You don’t want to get into political football ahead of an election. That said, they're already so cheap that any kind of recovery could very well take healthcare up big, especially on an individual company basis. This is a sector where individual stock selection is crucial.
Q: Would you buy deep in the money calls on PayPal (PYPL)?
A: Yes, I would. Wait for a down day. Today we’re up slightly, but if we have a weak afternoon and a weak opening tomorrow morning, that would be a good time to add more longs in technology. PayPal is absolutely at the top of the list, as are names like Adobe (ADBE) and Alphabet (GOOGL).
Q: Should I be buying LEAPS in this environment?
A: No; a LEAP is a one-year long term deep out-of-the-money call spread. That was a great December bottom trade. The people who bought leaps then made huge fortunes. We’re too high here to consider leaps for the main market unless it's for something that’s just been bombed out, like a Tesla (TSLA) or a Boeing (BA), where you had big drops—then I would look at LEAPS for the super decimated stocks. But the rest of the market is still too high for thinking about leaps. Wait a couple of months and we may get back to those December lows.
Q: What happened to your May 10th bear market call?
A: Actually, it’s kind of looking good. It’s looking in fact like the market topped on May 2nd. If saner heads prevail, the trade war will end (or at least we’ll get a fake agreement) and the market will go to a new high. If not, then that May 10th target forecast I made two years ago IS the final top.
Q: You’re saying today we’re at a bottom?
A: We’re at a bottom for a short-term trade with a June 21st target. That was the expiration date of the options spreads I did this week. Whether this is the final bottom in the whole down move for a longer term, no one has any idea, even if they try to say differently. This is totally dependent on political developments.
Q: What do you have to say about Lockheed Martin (LMT)?
A: This sector usually does well with a wartime background. Expect that to continue for the foreseeable future. But at a certain point, the defense stocks which have had fantastic runs under Trump will start to discount a democratic win in the next election. If that does happen, defense will get slaughtered. I would be using any future strength to sell out of the whole defense area. Peace could be fatal to this sector.
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
Mad Hedge Hot Tips
May 16, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) European Auto Tariff Delay Boosts Markets, in one of the administration’s daily attempts to manipulate the stock market. Click here.
2) Trade War to Wipe Out a Year’s Worth of Retail Profits. No one has any ability whatsoever, so the 25% price increase comes straight out of the P&L. Things were already bad and the bankruptcies are on the way. Click here.
3) Walmart Blows Out Earnings, but expects pain to come from a trade war that is seriously boosting prices. Buy (WMT), the next FANG. Click here.
4) Weekly Jobless Claims Plunge, by 16,000 to 212,000. No wonder the market is rising. Click here.
5) Heard at the SALT Conference. Chinese are given loyalty scores by government secret algorithms, much like US FICO scores, except that these measure an individual’s adherence to government policies. Score too low and your movements are restricted, as has happened to 30 million people, much like what a sub 600 FICO score does in America.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WHY US BONDS LOVE CHINESE TARIFFS)
(TLT), (TBT), (SOYB), (BA), (GM)
(THE BEST TESTIMONIAL EVER)
(WHY YOU SHOULD AVOID INTEL)
(INTC), (QCOM), (ORCL), (WDC)
