Global Market Comments
February 15, 2019
Fiat Lux
Featured Trade:
(THE CONTINUING DEATH OF RETAIL),
(AMZN), (WMT), (M), (JWN),
(TESTIMONIAL)
Mad Hedge Hot Tips
February 14, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Auto Loans Hit the Highest Delinquency Rate in 19 Years. Some 9% of all car loans are more than 3 months late. Is this the preview to the next financial crisis? Click here.
2) Business Confidence Hits a Two-Year Low, and Consumer Confidence hits an eight-year low. It seems a government shutdown and a stock market crash are not good for business. Now that stocks are up, will confidence return? Click here.
3) Google Investing $13 Billion in Data Centers. They must think their business outlook is pretty good. So do I. Buy (GOOGL). Click here.
4) Levi Strauss to Go Public. They have 501 blue jeans with shiny copper rivets, but it is a terrible investment idea. A low margin retailer in a cutthroat industry competing with China? You must be kidding. It’s another market-topping indicator. Click here.
5) Inflation Hits a One-Month Low, with the Consumer Price index Coming in at only 1.9%. It means the next recession will bring the deflation. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WHY I’M AVOIDING PFIZER LIKE THE PLAGUE)
(PFE), (MRK), (MVS),
(THE LIQUIDITY CRISIS COMING TO A MARKET NEAR YOU),
(TLT), (TBT), (MUB), (LQD),
(TESTIMONIAL)
(FACEBOOK’S NEW PROBLEM),
(FB), (GOOGL), (TRIP), (EXPE)
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
Mad Hedge Technology Letter
February 14, 2019
Fiat Lux
Featured Trade:
(FACEBOOK’S NEW PROBLEM),
(FB), (GOOGL), (TRIP), (EXPE)
A major catalyst exacerbating recent tech layoffs has been a decline in referral traffic to news publishers from Facebook (FB).
Blame the algos!
Referral traffic is a way of reporting visits coming from a site from sources outside of the original site.
When someone clicks on a hyperlink leading to a different website, data analytics classified this as a referral visit to the second site by tracking mechanisms.
The truth is that news publishers have a painfully smaller window to monetize content than ever before and this opinion is echoed by some of big media’s stalwarts such as Rupert Murdoch, the chairman of News Corp.
Facebook decided to give preference to content in the news feed that is shared between Facebook users over those by news organizations, ironically, the news is being stripped out of the news feed whether that seems logical or not.
Under the guise of protecting the platform, Facebook is applying this ploy to further cut off users from escaping its walled garden trapping them inside for the purpose of clicking around the Facebook website even more.
As the technology evolves, companies are becoming increasingly pedantic in finding any practical method of allowing users to escape to another part of the internet.
Diminishing user time equals fewer clicks followed by reduced digital advertising revenue.
Another shift in Facebook rules entails elevating and demoting media outlets by trust levels and credible content that ultimately Facebook makes the decision on.
The algorithms in this case would prop up the more renowned institutions and essentially cut out minnow news organization.
Algorithms are inherently biased, and sources of revenue are cut off or opened up by these algorithmic shifts.
The monopolistic status of Facebook has made it near impossible for stand-alone firms to develop organically and ramping up digitally means leveraging Facebook ads to lure new customers.
What does this all mean?
News publications are bracing themselves for an atrocious year.
The side effect from recent changes mean that Facebook will ultimately become the God of the news cycle choosing which news populates where on the news feed or if it shows up at all.
Being a left-leaning company, Facebook is likely to anoint left-leaning news organizations as “trustworthy” while demoting more right-wing news feeds pushing them further down the pecking order.
And for marginal start-up news companies praying for any exposure, this is effectively a death sentence because of the lack of footprint inside of Facebook’s current database.
Machine learning cannot account for new developments in the system, let alone system altering shifts causing this technology to be defective.
The technology handsomely rewards the entrenched that have cultivated a big footprint inside the database that decisions hinge on.
Its backward-looking nature to carry out a business that is forward-looking is utter nonsense.
Many third-party businesses attempt to stimulate Facebook users’ appetite in order to bridge them over and act as a stepping stone to their own website.
Small businesses should prepare for an era where this type of digital reach is stunted and at some point, completely disengaged.
Effectively, Facebook and the rest of the FANGs will do its best to cut off outside activity preferring to keep usership in-house.
News organizations are feeling the full brunt of these ripple effects with online media firms such as Vox Media and BuzzFeed cutting staff in response to these Facebook algorithm changes.
Which industry will get chopped down next?
Online travel aggregators.
TripAdvisor (TRIP) had a great winter quarter in 2018, but looking down the line, the business model could get bogged down by the algorithm problem.
For instance, take the best flight purchase algorithm in the world Google Flights.
The United States Department of Justice Antitrust Division approved Google's $700 million purchase of ITA Software in 2011.
Within a few months, Google bent its algorithm into shape and reformulated it as Google Flights.
How does it stack up?
Easy to use, lack of digital ads, best of breed, and innovative are all ways I would describe this service.
That is why consumers prefer Google Flights over any other service.
It offers open-ended searches making the traditional flight search software seem pathetic.
Simply input the departure location and Google Flights will show the user every price to every location in the world on a visual map.
It’s travel transparency at its brightest and users can change trips in an instant if something attractive catches their eye.
The user can mix and match different destinations and dates until an optimal time and place can be calibrated along with a suitable price.
This gives the power back to the consumers.
Once in a while, dispersion between the Google Flight price and the official airline site price can be irritating, but the accuracy has improved over time.
Truth be told, it’s a waste of time to use a different flight search engine now after the existence of Google Flights.
Google is able to do this because they are masters at building algorithms and have an army of engineers at their disposal.
Online flight brokers such as Expedia (EXPE) and TripAdvisor are on a collision course for the beast that is the Google algorithm division.
This dovetails astutely with my overarching theme of technology destroying every broker industry because FANG algorithm teams do a way better job enhancing this segment of business than anyone else.
As you correctly guessed, I am bearish Expedia and TripAdvisor long term.
Travel fare aggregators can’t compete with Google and former CEO of Expedia Dara Khosrowshahi was smart to take the head job at Uber saving him from the future carnage.
“As companies get bigger, they tend to slow down. It's a universal law.” - Said CEO of Uber Dara Khosrowshahi
Global Market Comments
February 14, 2019
Fiat Lux
Featured Trade:
(WHY I’M AVOIDING PFIZER LIKE THE PLAGUE)
(PFE), (MRK), (MVS),
(THE LIQUIDITY CRISIS COMING TO A MARKET NEAR YOU),
(TLT), (TBT), (MUB), (LQD),
(TESTIMONIAL)
You would think that the company that makes Viagra would be booming with all these baby boomers around.
It’s not.
As we come into the tag ends of the Q1 earnings season, it is hard to ignore the pitiful performance put on by Pfizer (PFE). Its fourth-quarter earnings were totally overshadowed by its disappointing outlook and underperforming shares.
The 168-year-old drug maker can expect sustainable growth in some of its product franchises, such as prostate cancer drug Xtandi, blood clot medication Eliquis, metastatic breast cancer drug Ibrance, and arthritis medicine Xeljanz.
However, generic competitors against Pfizer mainstays like Pristiq, an anti-depressant drug, and Viagra are threatening to trigger a massive decline in the former’s sales. With generic companies hot on its heels, Pfizer faces incredible pressure in terms of pricing and lower gross margins.
Expiring patents known as the loss of exclusivities (LOE) are also projected to contribute to their red ink by approximately $2.6 billion. In particular, Pfizer is expected to lose exclusive rights to its blockbuster drugs Lyrica in June 2019 and Chantix in the next few years. To date, their LOEs already cost Pfizer $2.1 billion in sales in 2017 and an additional $1.8 billion in 2018.
Pfizer is doing better than its competitors. In the past 12 months, Pfizer EPS stood at $1.86, which showed a 47.16% decline year-over-year. By comparison, major competitor Merck & Co., Inc. (MRK) EPS was at $0.69, suffering from a 281.58% decline year-over-year while Novartis (NVS) faced a 38.8% decline with an EPS of $0.52.
Pfizer’s recorded annual revenues of $53.4 billion, which puts it ahead of its major competitors Novartis ($51 billion) and Merck & Co., Inc. ($41.7 billion).
Bleak 2019 but promising 2022. That’s a long time to hold your breath.
As far as 2019 is concerned, the pharma heavyweight does not present any growth potential in both their top and bottom lines, with their midpoints offering slightly lower revenue and earnings compared with that in 2018.
Pfizer is projected to deliver a flat year-over-year performance regardless of the major headwinds primarily due to the strong sales of its remaining products. The company continues to remain confident as it awaits roughly 25 to 30 drug approvals up to year 2022.
Among these pending potential blockbuster products, 15 are expected to be approved by 2020. In addition, Xtandi, Ibrance, and Xeljanz/XR are slated for line extensions. With regard to long-term growth, Pfizer is well positioned to make headway on innovative medical breakthroughs in the next five years or so.
Pfizer is anticipated to reap the rewards of its $93 million investment in NextCure, which is a biopharmaceutical company focused on discovering and developing next-generation immuno-oncology-based drugs.
Pfizer has also been implementing various cost-cutting and productivity measures since 2017 in an effort to offset the effects of rising expenses and push for bottom line growth (read firing people).
Their efforts include investing in new market creation strategies as well as seizing opportunities to streamline their operations and cutting down organizational layers to eliminate (or at least reduce) bureaucracy.
These initiatives are anticipated to reach completion by 2019 and are expected to bring in approximately $1.4 billion in savings by 2020.
Given the challenges ahead, Pfizer seems to offer a promising future as seen in their efforts to curb their losses. While it remains to be seen if the company can come up with any notable acquisition to jumpstart their promised progress as early as 2020, Pfizer’s current products along with its pipeline candidates appear to be capable of delivering solid growth in succeeding years. Meanwhile, Pfizer is intent on providing a growing dividend to its shareholders.
In a nutshell, Pfizer’s current status is not ideal for investors interested in immediate profits. However, those who are patient enough to wait for a few more years could be in line to receive a dividend that could yield 3.5%.
Leave this one to the index funds and ETFs. There are better fish to fry in the space.
I had the great pleasure of having breakfast the other morning with my longtime friend, Mohamed El-Erian, former the co-CEO of the bond giant, PIMCO.
Mohamed argues that there has been a major loss of liquidity in the financial markets in recent decades that will eventually come home to haunt us all, and sooner than we think.
The result will be a structural increase in market volatility and wild gyrations in the prices of financial assets that will become commonplace.
We have already seen a few of these. Look no further than superstar NVIDIA (NVDA), which announced earnings in line with expectations in November but nevertheless responded with a 50% decline. It was a classic “Buy the rumor, sell the news” type move.
The worst is yet to come.
It is a problem that has been evolving for years.
When I started on Wall Street during the early 1980s, the model was very simple. You had a few big brokers servicing millions of small individual customers at fixed, non-negotiable commissions.
The big houses made so much money they could spend some dough facilitating counter cycle customers trades. This means they would step up to bid in falling markets and make offers in rising ones.
In any case, volatility was so low then that this never cost all that much, except on those rare occasions, such as the 1987 crash (we at Morgan Stanley lost $75 million in a day! Ouch!).
Competitive, meaning falling, commissions rates wiped out this business model. There were no longer profits to subsidize losses on the trading side, so the large firms quit risking their capital to help out customers altogether.
Now you have a larger number of brokers selling to a greatly shrunken number of end buyers, as financial assets in the US have become concentrated at the top.
Assets have also become institutionalized as they are piled into big hedge funds and a handful of very large index mutual funds and ETFs. These assets are managed by people who are also much smarter too.
The small individual investor on which the industry was originally built has almost become an extinct species.
There is no more “dumb money” left in the market, at least until this month.
Now those placing large orders were at the complete mercy of the market, often with egregious results.
Enter volatility. Lot’s of it.
What is particularly disturbing is that the disappearance of liquidity is coming now, just as the 35-year bull market in bonds is ending.
An entire generation of bond fund managers, almost two generations worth, have only seen prices rise, save for the occasional hickey that never lasted for more than a few months. They have no idea how to manage risk on the downside whatsoever.
I am willing to bet money that you or your clients have at least some, if not a lot of your money tied up in precisely these kinds of funds. All I can say is, “Watch out below.”
When the flash fire hits the movie theater, you are unlikely to be the one guy who gets out alive.
You hear a lot about when the Federal Reserve finally gets around to raising interest rates in earnest this year. They say it will make no difference as rates are coming off such a low base.
You know what? It may make a difference, maybe a big one.
This is because it will signify a major trend change, the first one for fixed income in more than three decades. Almost all of these guys really understand are trends and the next one will have a big fat “SELL” pasted on it for the fixed income world.
El-Erian has one of the best 90,000-foot views out there. A US citizen with an Egyptian father, he started out life at the old Salomon Smith Barney in London and went on to spend 15 years at the International Monetary Fund.
He joined PIMCO in 1999 and then moved on to manage the Harvard endowment fund.
He regularly makes the list of the world’s top thinkers. A lightweight Mohamed is not.
His final piece of advice? Engage in “constructive paranoia” and structure your portfolio to take advantage of these changes, rather than fall victim to them.
See the Long Term “Head and Shoulders” Top in the (TLT)?
I would like to express how much I enjoy reading your newsletter and the global views that I gain from it.
It has been the best, by far, and the most financially worthwhile letter I have ever bought. I find most newsletters spin and promote their returns during the good times, and never factor in or disclose their bad times.
I have had some bad trades with you, but the results from the good trades far outnumber them. I do take positions based on your recommendations and have done very well.
My portfolio has grown by over $1 million from shorting the yen, since late November, based on your calls. That is with no more than $200,000 invested in yen shorts at any one time. This has been far and away the single best trade of my life!
Thank you very much! May we all have many more of these!! Thanks John,
Rob,
Calgary, Alberta, Canada