Mad Hedge Technology Letter
May 30, 2019
Fiat Lux
Featured Trade:
(IS TARGET THE NEXT FANG?)
(TGT), (AMZN), (WMT)
This is the Mad Hedge Technology Letter finding you the best technology recommendations and sometimes, they come from unpredictable sources.
Retail and the digitization of this industry has made this area one of the biggest recipients of technology through the e-commerce portals such as Amazon (AMZN) and its competitors.
I have gone on record saying that Walmart is the next FANG and I do stand by that assertion.
Another company nipping at the heels of Walmart (WMT) and vying to become the next tech gamechanger is Target.
Target (TGT) has made all the right moves in all the right places by hyper digitizing their own operations, so much so, that it has morphed straight into the firing line of Silicon Valley and its commercial interests.
The first quarter marked Target’s eighth consecutive quarter of comparable sales increases.
Comparable sales growth of 4.8% exceeded even the most outlandish expectations.
There has been a positive response to Target’s same-day digital fulfillment services which was a response in large part to their competitor Amazon.
The fulfillment operations drove well over half of digital sales growth in the quarter.
The crucial ability to offer these same-day services, which delivers customers a high level of satisfaction, is a result of a carefully orchestrated strategy to put stores in the center of fulfillment.
In fact, Target stores handled more than 80% of the first quarter digital volume, including all of the same-day options combined with digital orders shipped directly from stores to guests’ homes.
The first quarter performance was also stronger than expected, up against an expectation for a rate decline, operating margins increased about 20 basis points in the quarter.
This performance reflected the precision of disciplined expense control tied with a favorable mix of digital fulfillment meaning that first quarter earnings per share grew more than 15% at the top end of the guidance range.
The clear outperformance occurred from multiple drivers, including strong holiday performance in the Valentine's Day and Easter periods, along with the powerful everyday traffic in the Food, Beverage, and Essential categories.
Target’s customers are responding passionately, driving rapid growth of the same-day options, including Drive-Up, and in-store pickup.
Perusing recent results, last year’s tariffs passed with minimal carnage and Target has put in motion contingency plans this time around to mitigate the impact of additional tariffs already scheduled for next month.
The China trade war does pose a serious potential drag on margins, and if e-commerce gets hit with higher cost of goods, then not only will Target feel the torture, but so will the likes of Amazon and Walmart.
Geopolitical risk is the main burden holding back the broad market, and the price action has reflected the increasing risk that the trade war will destroy earnings growth and become a strong catalyst for an equity reset.
This is the main reason why I cannot say with utter conviction to buy the company today.
In a top down world, the issues at the top take precedent and investors must absorb this.
Ultimately, Target’s growth strategy entails building and rolling out a comprehensive set of digital fulfillment capabilities, allowing them to provide customers with a convenient fulfillment option for every shopping journey.
As a result of those efforts, Target now offers more digital fulfillment options across more of the country than anyone else in retail.
When customers are planning on being out and about, they can shop on their digital device and Target is able to deliver their order in an hour or two.
Target offers in-store pickup in every one of the 1,851 locations, and Target even walks the order out to the parking lot in more than 1,250 stores.
There are no fees for either of the same-day options.
Shipt, the same-day grocery delivery service acquired by Target last year, offers unlimited free same-day delivery from Target and more than 50 other retailers across the country for $99 annual fee.
A portion of Target’s digital orders are and will continue to be shipped from upstream fulfillment centers. And other items will continue to be shipped directly by other vendors.
Target has effectively transitioned into the Amazon style fulfillment center strategy based on speed and scale.
Target is on track to grow digital sales by more than $1 billion in 2019 and fulfilling even higher percentages of this volume from in-house stores.
Using stores as digital hubs enhances Target’s speed and reduces cost, and importantly, moving to store fulfillment does not increase the frequency of split shipments.
In fact, even though store fulfillment continues to grow rapidly, the rate of split shipments this year is running lower both in Target stores and in total compared with last year.
This allowed management to enhance customers experience which can be seen by repeat business.
There are essentially only three e-commerce companies that have taken full advantage arming themselves with a wicked fulfillment center operation – Amazon, Walmart, and Target.
Other retailers that either do not have the capital to scale, and the resources to digitize will continue to lose business because they simply can’t provide the same quality of customer experience these trio offer.
The financials reflect the great success Target is experiencing today.
Over the last 2 years, earnings results have beaten EPS estimates 63% of the time and have beaten revenue estimates 88% of the time.
Target has taken some apparel market share away from the mall group with comp sales up 4.8% when consensus was 4.2%.
Digital sales were up 42% year-over-year in Q1 signaling that the success or failure of digitizing a business is the x-factor in 2019.
That trend could perpetuate this summer, with Target executives convinced today that the company's brand-new partnership with Vineyard Vines is already one of the most successful in its history.
Digital purchases that originate online now represent 7.1% of Target’s total transactions, up from 5.2% a year ago showing how the digital business is making even deeper inroads each year.
Total revenue was up 5% to $17.63 billion from $16.78 billion last year, smashing estimates of $17.52 billion.
These three e-commerce companies will be the ones standing when the dust settles, and unluckily, there will be some periods when geopolitics and other macroeconomic issues overwhelm the individual stock story.
All else being equal, Target is a smart long-term hold and this firm is in the first innings of a massive digital transformation.
I am confident they will overdeliver on the rest of their annual financial targets.
“If you go back to 1800, everybody was poor. I mean everybody. The Industrial Revolution kicked in, and a lot of countries benefited, but by no means everyone.” – Said Founder of Microsoft Bill Gates
Global Market Comments
May 30, 2019
Fiat Lux
Featured Trade:
(FRIDAY, JULY 19 ZERMATT, SWITZERLAND STRATEGY SEMINAR)
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM TRIPLED MY PERFORMANCE),
(TESTIMONIAL)
Going to renew my membership today because you provide great ideas. I think you have a lot of integrity in your messages.
We may not agree politically, but you have nailed many of the concepts you shepherd.
I have become a fan and look forward to your writing every day.
Don
Cleveland, Ohio
Sometimes I’m a Real Saint
“The car business is hell,” said founder Elon Musk when announcing he would sleep in the Fremont Tesla factory until Model S production reached 2,500 units a week.
Mad Hedge Hot Tips
May 29, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
SPECIAL MORE PAIN TO COME ISSUE
1) The Double Top in Bonds is Only Three Points Away, taking you to a 2.05% yield on ten-year US Treasury bonds. The July 2016 top is where you want to start laying out their short positions in bonds again, or $133 in the (TLT). Yields are inverting too, with short rates topping long rates in this always accurate recession predictor. Click here.
2) The Trade War Ramps Up, with China moving to ban FedEx and restricting rare earth exports to the US essential for all electronics manufacture. The big question in investor minds becomes “Is Apple next?” Click here.
3) US Car Sales Are Fading, as another pillar of the US economy crumbles. Expect the Big Three will become the Big Two in the next recession. Click here.
4) Boeing 737 MAX Not Returning Until August, says IATA head, creating a massive shortage of aircraft this summer. Too bad (BA) has become a punching bag in the trade war. Click here.
5) OECD Cuts Global Growth Forecast, from 3.9% to 3.1% for 2019 because of you know what. Stock markets are now down for their fifth week, as the 200-day moving average comes within striking distance. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WEDNESDAY JULY 10 BUDAPEST HUNGARY STRATEGY LUNCHEON)
(ONSHORING TAKES ANOTHER GREAT LEAP (TSLA), (UMX), (EWW), FORWARD),
(KISS THAT UNION JOB GOODBYE),
(CHINA TO BAN FEDEX)
(HUAWEI), (AMZN), (FDX), (UPS), (DPSGY), (BABA), (ZTO)
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 29, 2019
Fiat Lux
Featured Trade:
(WEDNESDAY, JULY 10 BUDAPEST, HUNGARY STRATEGY LUNCHEON)
(ONSHORING TAKES ANOTHER GREAT LEAP FORWARD),
(TSLA), (UMX), (EWW),
(KISS THAT UNION JOB GOODBYE),
Have you tried to hire a sewing machine operator lately?
I haven’t, but I have friends running major apparel companies who have (where do you think I get all those tight-fitting jeans?).
Guess what? There aren’t any to be had.
Since 1990, some 77% of the American textile workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.
Now that manufacturing is, at last, coming home, the race is on to find the workers to man it.
Welcome to onshoring 2.0.
The development has been prompted by several seemingly unrelated events.
There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low-cost producer which have killed thousands.
Today’s young consumers want to look cool but have a clean conscience as well. That doesn’t happen when your threads are sewn together by child slave laborers working for $1 a day.
Several firms are now tapping into the high-end market where the well-off are willingly paying top dollar for a well-made “Made in America” label.
Look no further than 7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all-American manufacturer.
As a result, wages for cut-and-sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for the industry as a whole.
Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers.
They advertise in languages with high proportions of blue-collar workers, such as Spanish, Somali, and Hmong.
New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.
Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying U.S. factories.
But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.
That is a crucial advantage in today’s fast-paced, high-turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.
By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.
The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades.
It has also been blamed for losses of U.S. jobs, with some estimates reaching as high as 25 million.
When offshoring first started 50 years ago, it was a total no-brainer.
Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.
So American electronics makers began filing overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines.
After the U.S. normalized relations with China in 1978, the action moved there and found that labor was even cheaper.
Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn’t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.
Today, it is $6,000, and $26,000 for trained technicians, with total compensation still rising 20% a year. At this rate, U.S. and Chinese wages will reach parity in about 10 years.
But wages won’t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks.
Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.
Natural disasters such as earthquakes, fires, and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a highly tuned, incredibly complex watch.
There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the U.S. fleet and the Chinese military playing an endless game of chicken off the coast, we are one midair collision away from a major diplomatic incident.
Protectionism constantly threatens to boil over in the U.S., whether it is over the dumping of chicken feet, tires, or the latest, solar cells.
This is what the visit to the Foxconn factory by Apple’s CEO Tim Cook was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?
Work will come back to the U.S. all the faster. The Chinese press was ripe with speculation that Apple-induced reforms might spread to the rest of the country like wildfire.
The late General Motors (GM) CEO Dan Adkerson once told me his company was reconsidering its global production strategy in the wake of the Thai floods.
Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.
The impact of a real onshoring move on the U.S. economy would be huge. Some economists estimate that as many as 10% to 30% of the jobs lost to offshoring could return.
At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.
It would add $20 billion to $60 billion in GDP per year or up to 0.4% in economic growth per year.
It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ½ years?
Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low-wage jobs in the world.
After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.
