Mad Hedge Technology Letter
August 12, 2019
Fiat Lux
Featured Trade:
(UNSTOPPABLE ROKU)
(ROKU)
Mad Hedge Technology Letter
August 12, 2019
Fiat Lux
Featured Trade:
(UNSTOPPABLE ROKU)
(ROKU)
Roku has been unleashed.
To be honest, I was worried when it dipped all the way down to $25 last year because it was a stock that was prime for liftoff.
Liftoff has happened but a little later than I first surmised.
Roku had a blowout quarter crushing estimates with expanding their pie 59% year-over-year to $250 million scorching consensus estimates of $224 million.
The outperformance doesn’t stop there with the company rapidly adding users to 30.5 million active users during the quarter, up 39% year-over-year.
The monetization side showed the same outperformance with average revenue per user (ARPU) up to $21.06, up $2.00 year-over-year.
For all the doubters out there, who dismissed the potential of Roku because they weren’t part of an Amazon, Google, Facebook, or Apple group, then you were wrong.
What we have seen in the past year is the potential transforming in real-time into high octane outperformance.
The x-factor that put the company’s business model over the edge was the “onslaught” of new streaming assets coming online this year and in 2020 from Disney, NBCUniversal, and HBO.
Recent surveys suggest that Amazon’s Fire TVs haven’t been able to keep up with Roku.
And as Disney and NBC roll out gleaming new streaming assets, Roku will be able to do what is does best – sell digital ads.
Roku being independent doesn’t care who streams what because selling ads can be sold on any streaming program.
This makes me believe that Roku is in a better position not being a Fang because of a lack of conflict of interest.
For example, Google and Amazon have skirmished about different crossover partnerships such as YouTube on the Amazon Kindle and so on.
They plainly don’t want to help each other
Part of the DNA of these big tech companies is bringing each other down.
In my mind, Roku has definitely benefited from the first-mover advantage and have perfected selling digital ads over over-the-top (OTT) boxes.
It just so happens that Roku has prepared itself to extract maximum profits from the intersection of integrating online streaming assets and the consumer quitting analog cable.
The timing couldn’t have been better if they tried.
In its infancy, Roku’s revenue was reliant on selling the physical hardware, but that revenue has trailed off at the perfect time because of the explosion of digital ad growth in the industry boosting its other business.
Perhaps even more impressive is the loss of 8 cents last quarter when the company was expected to lose 22 cents.
This signals to investors that profitability is just around the corner for Roku and after years of burning cash, they are finally ready to turn the page and start a new chapter in the history of Roku.
Roku bottomed out at $25 and is now trading over $125, an extraordinary feat and one of the stories of the tech industry in 2019.
I wouldn’t chase the stock here, but I will say the momentum is palpable and Roku will end the year higher than where it is now.
It’s a great stock with an even more compelling story and about to harvest and monetize the new streaming assets that are coming through the pipeline.
“I believe this artificial intelligence is going to be our partner. If we misuse it, it will be a risk. If we use it right, it can be our partner.” – Said CEO of Softbank Masayoshi Son
Mad Hedge Technology Letter
August 9, 2019
Fiat Lux
Featured Trade:
(HIGH-RISK LYFT)
(LYFT), (UBER)
Global Market Comments
August 9, 2019
Fiat Lux
Featured Trade:
(AUGUST 7 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (XLK), (GLD), (DIS), (TLT),
(FXA), (FXY), (VIX), (VXX), (UNG), (USO)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader August 7 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Are we headed for a worldwide depression with today’s crash and interest rates?
A: No, I think the interest rates are more of an anomaly unique to the bond market. There is a global cash glut all around the world and all that money is pouring into bonds—not for any kind of return, but as a parking place to avoid the next recession. The economic data is actually stronger than usual for pre-recession indicators. US interest rates going to zero is just a matter of coming in line with the rest of the world. Three to six months from now we may get our final bear market and recession indicators.
Q: Do you think the market has more downside?
A: Yes; if the 200-day moving average for the (SPY) doesn’t hold, then you’re really looking at a potential 20% correction, not the 8% correction we have seen so far.
Q: Which sector would you focus on for any dips?
A: Technology (XLK). If they lead the downturn, they’re going to lead the upturn too. It’s the only place where you have consistent earnings growth going out many years. You’re really all looking for an opportunity to go back into Tech, but the answer is a firm not yet.
Q: Would you buy gold (GLD), even up here?
A: Only if you can take some pain. We’re way overdue for a correction on essentially everything—stocks, bonds, gold, commodities—and when we get it, you can get a real snapback on all these prices. The time to enter gold trade was really a month ago before we took off, and I’ve been bullish on gold all year. So, I think you kind of missed the entry point for gold just like you missed the entry point for shorts on the stock market last week. You only want to be selling decent rallies now. You don’t want to be selling into a hole that makes the risk/reward no good.
Q: What can you say about the (FXA) (the Australian dollar)?
A: It’s holding up surprisingly well given the carnage seen in the rest of the financial markets. I want to stand aside until we get some stability, at which point I think (FXA) will pop up back to the $71 level. New Zealand cutting their rates by 50 basis points really came out of the blue and could eventually feed into a weaker Aussie.
Q: Do you think China (FXI) has no reason to make a trade deal until the US elections?
A: Absolutely not; and this puts a spotlight on the administration’s total inexperience in dealing with China. I could have told you on day one: there’s no way they’re going to settle. Pride is a major factor in China. They have long memories of the opium wars and all the abuses they received at the hands of the western powers and are highly sensitive to any kind of foreign abuse. If you want to get the opposite of a settlement, do exactly what Trump is doing. The administration’s policy has no chance of accomplishing anything. He’s willing to take a lot more pain in the stock market until he gets a deal and that’s bad for all of us.
Q: How does the extra 10% tariff affect the market?
A: Think of everything you’re buying for Christmas; the price goes up 10%. That’s the effect, and it completely wipes out any earnings the retail industry might have had. It’s only bad. We are suffering less harm than China in the trade war, but we are suffering, nonetheless.
Q: Do you think volatility will spike soon?
A: It may very well have already spiked. I don’t think we’ll get a spike as high as in past selloffs because there’s a big short volatility industry that has come back. Any moves more than $30, you have short sellers come in there very quickly to hammer things back down. Also (VIX) isn’t necessarily something you want to be buying after the stock market has already dropped 8%. That train has left the station.
Q: Would a weaker dollar benefit the US economy?
A: Yes; it makes our exports cheaper on the global market. However, if the rest of the world is weakening their currencies as well, it will have no effect. Also, the last time this kind of currency war was attempted was in the early 1930s, and the outcome was the Great Depression.
Q: Defensive stocks—the China story is getting uglier?
A: In this kind of market, I’ve never been a big fan of defensive stocks like utilities or healthcare because defensive stocks go down in bear markets, just at a slower rate than growth stocks because they never went up in the first place. The best defensive stock is cash.
Q: If US interest rates are going to zero, how about buying leaps on (TLT)?
A: Multi-year highs is just not leap buying territory. Multiyear lows are where you buy LEAPS, which are Long Term Equity Participation Certificates. They are basically long-dated 1-2-year call options on stocks that are rising over the long term. The better trade—when we get to zero interest rates and it becomes impossible for rates to go any lower—would be to do a reverse leap. If (TLT) goes up to $200, I would do something like a $150-$160 on the put side betting that sometime over the next 2 years, interest rates go back up again and bonds go down. Too late for LEAPS on bonds, too early for LEAPS on equities.
Q: Do you buy out of the money LEAPS?
A: Yes; that is where you get the triple-digit returns. For example, you can buy the Walt Disney (DIS) June 2021 $150-$160 vertical bull call spread today for $3.30. If we close over $160 by then the spread will be worth $10, up 203% from your cost. And you only need a rise of 25% from here to get that return. This is why I love LEAPS, but only at medium term market bottoms.
Q: Is crude oil (USO) going to $25 on a barrel global slowdown fears?
A: I think you need an actual recession to go down to $25; in the current environment, $42 is a nice target. The basic problem is global structural oversupply and falling demand, which is a classically unfortunate combination for prices.
Q: When will interest rates go to zero?
A: Sooner than later, I would say. My original guess was sometime next year but at the rate we’re going, we could be there by the end of the year.
Q: Would you get involved in natural gas (UNG)?
A: Absolutely not; this is the high season for natural gas right now when summer air conditioner use creates peak demand. It certainly has been hot this summer, especially on a global basis, and if you can’t rally natural gas in this environment you never will. There is also a huge contango in (UNG) which most people can’t beat.
Lyft (LYFT) has the wind at its back but that doesn’t mean you should bet the ranch on it.
In Silicon Valley, “peak losses” are two words that can deliver a great earnings report.
That is where we are at with tech’s risk tolerance.
It’s no surprise some of these outfits burn money like no other, Lyft rejigged guidance from EBITDA losses of $1.15 billion to $1.175 billion down to $850 million to $875 million.
The main reason Uber (UBER), Lyft, and I’ll lump Netflix (NFLX) into the mix too, lose money is because they intentionally underprice their services allowing consumers to take advantage of a great deal in relative terms stoking outperforming revenue growth.
All those years of losses can be shouldered by the venture capitalists if revenue growth outweighs the pain of short-term losses.
But when a company takes that step to go public, everything changes.
No longer can they sweep the mountain of losses under the carpet to the deep-pocketed VCs, but they are penalized for it by a lower share price under the control of panicky shareholders.
Lyft started to raise prices in June and since Uber went public as well, the duopoly is in the same boat.
This means that your rideshare route home from the bar after the last call is about to get more expensive.
Since Lyft and Uber have a boatload of data, they will surgically pick and identify the routes and distance that do the least damage to end demand.
This will clearly be the routes and distances that have such an overwhelming and pent up demand that they can nudge up prices an extra 5% or more if they can get away with it.
In my head, these routes mean downtowns in metros with high paying jobs with poor public transportation links such as Los Angeles or Seattle.
Another route that I believe will get a bump in price is late-night surcharges often when partygoers are inebriated or out on the town.
Lyft has pockets of opportunities to exploit.
The cost inflation won’t stop there because even though Lyft “beat expectations” due to this pricing change, there is the long-term fixation on profitability that haunts management.
The pricing trick made Lyft rejig its annual targets expecting revenue of between $3.47 billion and $3.5 billion this year, up from a previously stated range of $3.275 billion to $3.3 billion.
The one metric that bodes well for the service is the 21.8 million “active riders” on its platform beating expectations by about 0.7 million year-over-year.
Lyft’s services are scalable and the growth will help mitigate losses and even though it’s in the public market, that doesn’t mean that it can’t stop growing.
Both ride-sharing services going public at almost the same time has meant that the price war that resulted in massive discounts to riders is no more.
Each service has incentives to raise prices in the most pain-reductive way possible for riders.
This particular tech category is certainly high risk - high reward as Lyft and Uber still face ongoing litigation in California courts concerning the job status of its drivers about whether they are classified as employees or independent contractors.
The more imminent issue is how much can they price hike before consumers balk.
Riders certainly have a price threshold that they aren’t willing to accommodate.
Luckily, Uber and Lyft have a treasure trove of data and can manipulate it to their interests by floating out trial balloons to test bold initiatives.
These two tech companies will not be able to shake off the volatility disease for the foreseeable future as the laundry list of predicaments spell turbulence.
Long term, they must show more to investors than “peak losses” but for the time being, they have survived the gauntlet.
I would not buy shares short-term, the most recent spike has snatched away an accommodative entry point.
“Bigger than the world of the world is your mind.” – Said Founder and CEO of Huawei Ren Zhengfei
Global Market Comments
August 8, 2019
Fiat Lux
Featured Trade:
(HOW TO KNOW IF THE BULL MARKET IS WELL AND TRULY OVER),
(THE TALE OF TWO ECONOMIES),
(FB), (AAPL), (AMZN)
I have lately been besieged with emails from followers asking if they should sell everything, put all their money into cash, and if the great bull market is well and truly over.
My answer is the same to all. If a full-throated and affirmative “NOT YET”. Things may look scary now, but they could get a lot worse, and eventually, that will take place.
I’ll tell you why. I have a laundry list of issues that could kill the bull once and for all. And while some of them are flashing alarm signals, many aren’t. I’ll go through them one by one.
Inequality
The Trade War – is far and away the biggest risk to the market. If each escalation is met with Chinese retaliation, then both countries will slide into recession. At some point, cooler heads may prevail but that is no sure thing. Having met several men who endured the 1936-38 Long March, I can assure you that the Chinese have a far better ability to sustain pain than we do. And the Chinese don’t have an election next year.
Cyber Terrorism – Imagine that you sat down to turn on your computer one day and nothing happened. The Internet was down, all financial transactions ceased, the power went out, and all food distribution ceased. America’s Internet infrastructure is far more vulnerable than most people realize. That's why I have been recommending cybersecurity stocks for the past decade. Certainly, my own local utility, PG&E (PGE) doesn’t maintain security to a military standard. It should.
Debt Levels in China – It’s easy to forget that perhaps 40% of China’s government-owned financial institutions are de facto bankrupt. They have been accumulating bad loans for decades and hiding them on their balance sheets and essential negative net worths. If one suddenly goes under, it could easily lead to a cascading series of bankruptcies much as we saw in the US during the 2008 financial crisis that spills over to the US and Europe. Back then, we lost Lehman Brothers and Bear Steans, and could have lost everyone if the government hadn’t stepped in.
Debt levels in the US – Passage of the latest spending bill means the US national debt is about to soar from $22 to $24 trillion over the next two years. The markets are ignoring this for now. It won’t forever.
Movement to the Left – Trump has run the most radically right-wing government in American history. Can you believe that we are now in the concentration camp business? The risk is that the electorate responds by installing a radical left-wing government in 2020 in reaction. That would bring a return of 90% personal tax rates, the elimination of long term capital gains treatments, and other policies with a strong anti-business tilt.
Global Interest Rates at Zero – We seem to be well on our way there. Once at zero, central banks will be powerless to get us out of recessions by cutting rates. Just look at how Japan has done over the past 30 years.
2020 Election – Is going to be loaded with fireworks to be sure. The rancor may get so extreme on both sides that it literally scares people out the market.
Middle East War – War with Iran, which is now threatened daily by the administration, will be an enormous drag of the US economy. Investment shifts from machinery to weapons, which have no impact on productivity.
Trump Blows Up – The president implements a policy that is so deleterious to the US economy that the stock market panics. Some would argue we are already there.
Climate Change Accelerates – That is already happening but is hurting countries closer to the equator than ourselves, like India and Egypt. The US military certainly considers this an existential threat. Increased severe hurricanes, heat caused crop failures, wildfires, and more frequent flooding are already having severe localized effects. Imagine all that getting much worse. And there are severe impacts which we haven’t even thought about yet. The first effect we have already seen? Higher insurance premiums for everyone. Good luck getting new fire insurance in California or flood insurance in Florida.
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