Global Market Comments
May 29, 2020
Fiat Lux
Featured Trade:
(JOIN THE JUNE 4 TRADERS & INVESTORS SUMMIT),
(THE CONTINUING DEATH OF RETAIL),
(AMZN), (WMT), (M), (JWN),
(TESTIMONIAL)
If you had to pick the biggest loser of our ongoing pandemic and the trade wars, it would be the retail industry (XRT). Higher costs which can’t be passed on, rising minimum wages, lower selling prices, and a massive inventory glut is not what money-making is all about.
Now, take all of those problems and drop your revenues by half, thanks to the pandemic. A future where touching, feeling, and trying on things before you buy them is about to become an extravagant luxury.
The stocks have delivered as expected, providing one of the worst-performing sectors of the past three years. Half of them probably won’t even make it until Christmas.
In fact, Sears and Macy’s have announced more store closings nationwide. The overhead is killing them in a micro margin world devoid of window shopping customers.
So, I stopped at a Walmart (WMT) the other day on my way to Napa Valley to find out why.
I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long stem roses would prove useful. I happened to know you could get these for $10 a dozen at Walmart, 60% cheaper than anywhere else.
After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.
The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there, customers OR employees.
The Macy’s downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.
However, it now appears we have reached both a tipping point and a point of no return. The future is happening faster than anyone thought possible. The pandemic has forced business evolution to move at hyper fast forward and the Death of Retail is no exception.
I remember the first purchases I made at Amazon 20 years ago. I personally knew the founder, Jeff Bezos, from my Morgan Stanley days. The idea sounded so dubious that I made my initial purchases with a credit card with only a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.
And how stupid was that name, Amazon, anyway? At least he didn’t call it “Yahoo” because it was already taken.
Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don’t have to fight traffic, engage in the parking space wars, or wait in line to pay.
It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!
A used 42-inch Sub Zero refrigerator with a front door ice maker and water dispenser? Have it there in two days, with free shipping at one fifth the $17,000 full retail price.
So I was not surprised when I learned that Amazon accounted for 25% of all new online sales in 2019 in a market that is already growing at a breathtaking 20% YOY.
In 2000, after the great “Y2K” disaster that failed to show, I met with Bill Gates Sr. to discuss his foundation’s investments.
It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds. It turned out to be a brilliant move, coming mere months before the Dotcom bust and a 20-year bull market in fixed income which only peaked two months ago.
Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn’t invested a dollar in commercial real estate. Today, that looks like a prescient move in the extreme with 60% of mall tenants skipping their rent.
It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers, and rendering commuting unnecessary. Shopping malls would become low rent climbing walls and paintball game centers.
Mr. Gates’ prediction may finally be occurring. In the San Francisco Bay area, the only employed people are those who are telecommuting.
Even before the pandemic, it was common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.
The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company, with no office. Everyone works at home in four countries around the world. Oh, and we all use Amazon to do our shopping.
The downside to this is that whenever there is a snowstorm anywhere in the country, it affects our output. Two storms are a disaster, and at three, such as last winter, we grind to a virtual halt.
The main thing I am worried about is the Internet in the Philippines which is unable to handle the tenfold increase in demand since the start of the pandemic. They don’t have our infrastructure. If you wonder why your customer support at any company has suddenly gotten poor, that is the reason.
You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch), so was sending out an Alert while hanging on the cliff face of a Swiss Alp. But they both made money.
Moroccan cell coverage is better than ours, but the dromedary’s swaying movement made it hard to hit the right keys.
The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we’re hiring, especially in marketing.
It is happening because the entire “bricks and mortar” industry is getting left behind by the march of history.
Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of Amazon, with higher prices and worse service. It is all “hour late and dollar short” stuff.
In the meantime, Amazon has soared by an eye-popping 56% since the March 23 low and is one of the top-performing big-cap stocks of 2020. There is now a cluster of Amazon analyst forecasts targeting the $3,000 mark, including me.
And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!
There’s a good reason why you haven’t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.
I did this when I realized that management never knew beforehand which of their products would succeed and which would bomb, and therefore, were constantly clueless about future earnings.
The business for them was an endless roll of the dice. That is a proposition in which I was unwilling to invest. There were always better trades.
I confess that I had to look up the ticker symbols for this story, as I never use them.
You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers, citing how “cheap” they are because the prices are so low.
Never confuse a low stock price with “cheap.”
It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when “cheap” was on its way to zero for almost every company. Don’t buy the next coal company.
So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.
Or better yet, go shopping at Amazon. The deals are to die for.
To read “An Evening with Bill Gates Sr.,” please click here.
Thanks for the great newsletter and advice. I truly enjoy it. You are one of a kind!
Credits to you as my financial navigator, as I am finally making some serious money after years of doing it the hard and wrong way.
Kind regards
Rolf
“The factory of the future will have only two employees: a man and a dog. The man will be there to feed the dog. The dog will be there to keep the many from touching the equipment,” said organizational consultant, Warren Bennis.
Global Market Comments
May 28, 2020
Fiat Lux
Featured Trade:
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
I knew the letter from the IRS sitting in my mailbox was bad news just from the color of the paper.
It was not light green, the color of a refund check from the United States Treasury. Instead, it was white, warning that it contained some sort of demand, audit notice, or threatened legal action.
In fact, it was far worse than that.
In the most stilted, bureaucratic language possible, I was informed that my $100,000 tax refund for 2018 had been already been paid out to someone else.
Another party using my name and social security number, but a different address, had already filed a 2018 return for me.
In order to get my money back, I would have to file a new return and include hard copies of every single piece of supporting documentation. It was in effect a full paper audit. Then I would have to wait 60 days.
This was three months ago.
I informed my accountant immediately. I heard him shout across the room to his partner, “Hey Joe, I’ve got another one.”
He told me that half of his clients had had their refund checks stolen this year, and as a result, the IRS was now demanding automatic audits on all refund requests of $10,000 or more.
It gets worse. Budget cuts at the despised government agency mean that huge delays are occurring in almost all interactions. Even routine requests can sit on a bureaucrat’s desk for two years. The number of standard audits has fallen substantially.
Of the more than 245 million tax returns the IRS processed in 2017, only 1 in 160 individual returns — 0.6 percent — were audited. That marks a sixth consecutive annual decline in audits and amounts to the lowest level in 15 years. About 934,000 returns were audited in 2017, the lowest number since 2003, according to agency data.
The ones that take place are just a quick pass over, often conducted by mail rather than the in-person, full proctologic examinations of the past.
Furthermore, the government didn’t have the money to pay for the latest upgrade of QuickBooks Pro until 2018.
This means was unable to use the online accounting service’s spreadsheets during audits when the taxpayer’s accountant has upgraded, greatly increasing the time required for each audit while decreasing its effectiveness.
As a result, QuickBooks is seeing the fastest and most widespread adoption of its latest software version in history.
You can’t make this stuff up.
I asked my accountant how long it would really take for me to collect my 2018 refund. “Better count on a year,” he said.
Then the news flash came out that hacker has stolen the tax returns of 100,000 individuals, including their personal information. I was clearly one of those victims.
Not only did the crooks discover my name and social security number, they also knew that my high school team name was the “Apaches,” my first car was a “Volkswagen,” and that I was married in “Tokyo.”
I bet they know my inside leg measurement as well (I’m not telling!).
It all reminds me that it is once again time to revisit Palo Alto Networks (PANW) and FireEye (FEYE). I have been recommending these two cybersecurity names for the past three years, issuing Trade Alerts on each opportunistic dip.
The near-destruction of Sony (SNE) by North Korean hackers has certainly put the fear of God into corporate America.
Apparently, they have no sense of humor whatsoever north of the 38th parallel.
I saw The Interview the other day on a plane, the film making fun of Supreme Leader Kim Jong-un that so pissed them off, and it totally sucked.
As a result, there is a generational upgrade in cybersecurity underway, with many potential targets boosting spending by multiples.
It’s not often that I get a stock recommendation from an army general. That is exactly what happened the other day when I was speaking to a three-star about the long-term implications of the Iran peace deal.
He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online, as they have been silently and invisibly over the past 15 years.
All of those trillions of dollars spent on big ticket, heavy metal weapons systems are pure pork designed by politicians to buy voters in marginal swing states.
The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.
The problem is that when wars become cheaper, you fight more of them, as is the case with online combat. Cyber wars are now happening every day, all the time, 24/7, and everywhere.
You probably don’t know this, but during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon’s mainframe computers at least seven times.
This was a neat trick because these computers were in stand-alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way.
In the process, they obtained the designs of all of our most advanced weapons systems, including our best nukes. What have they done with this top-secret information?
Absolutely nothing.
Like many in senior levels of the US military, the Chinese have concluded that nuclear weapons are a useless waste of valuable resources.
Far better value for money is more hackers, coders, and servers, which the Chinese have pursued with a vengeance.
You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites.
Some Mad Hedge Fund Trader subscribers in the Middle Kingdom have told me they can no longer access their US-based online brokerage accounts, which are blocked by mainland “porn” filters.
“Porn” is defined as anything the Chinese government doesn’t agree with.
Try sending an email to someone in the Middle Kingdom with a Gmail address. It is almost impossible. This is why Google (GOOG) closed their offices five years ago.
As a member of the Joint Chiefs of Staff recently told me, “The greatest threat to national defense is wasting money on national defense.”
Although my brass-hatted friend didn’t mention the company by name, the implication is that I need to go out and buy Palo Alto Networks (PANW) right now.
Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California, just across the water from my Bay area office.
The company’s core products are advanced firewalls designed to provide network security, visibility, and granular control of network activity based on application, user, and content identification.
Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.
The really interesting thing about this industry is that there are no losers.
That’s because companies are taking a layered approach to cybersecurity, parceling out contracts to many of the leading firms at once, looking to hedge their bets.
To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.
This makes a basket approach to the industry more feasible than usual.
You can do this through buying the $70 million capitalized PureFunds ISE Cyber Security ETF (HACK), which boasts Cyberark Software (CYBR), Infoblox (BLOX), and Fireye (FEYE) as its three largest positions. (HACK) has been a hedge fund favorite since the Sony attack.
As for my tax refund, I am still waiting.
“Statistics building off an extremely small base is extremely misleading. The recent economic gains look like typos in some of these categories. Let me know when you have gains from the January base and I’ll believe in the recovery, ” said Josh Brown, an investment advisor.
Global Market Comments
May 27, 2020
Fiat Lux
Featured Trade:
(JOIN THE JUNE 4 TRADERS & INVESTORS SUMMIT),
(IT’S NOT YOU FATHER’S MARINE CORPS)
This being the week for Memorial Day, I think I will be forgiven for posting one more military piece.
Most Americans don’t know that the US Marine Corps is the oldest government institution in the United States. It was founded at Tun Tavern on Water Street in Philadelphia on November 10, 1775, nearly eight months before the establishment of the country itself on July 4, 1776.
Their original mission was to act as snipers from the top of ships’ masts against British ships, engage in hand-to-hand combat when boarding the enemy, and preventing mutinies by press-ganged crews. It was truly a different age.
Having been involved with the USMC for nearly 50 years in many forms, following in the footsteps of my father in WWII and my grandfather in WWI, I can tell you than many Marines have not strayed far from a bar since.
During the past 245 years, the Marine Corps has built a storied reputation as an elite force of shock troops which will fight anywhere at any time. They literally went into battle from the “shores of Montezuma to the shores of Tripoli”, according to the Marine Corps Hymn.
Over the past century, my own family has served at Belleau Wood, France, where the Germans gave them their nickname, the “Devil Dogs.” Dad was at Guadalcanal, Bougainville, Samoa, and New Zealand.
My own contribution included Cambodia, Guam, Japan, Thailand, Burma, Laos, Croatia, Serbia, Iraq, Kuwait, Saudi Arabia, and most recently, Guadalcanal. We have a family footlocker of war souvenirs to die for. Yes, three months ago I was digging out Japanese bullets fired at dad from his foxhole at the base of Hill 27 (click here for the link).
Now, for the first time in nearly three centuries, the Corps is undergoing radical change. Since 1990, it has been primarily engaged in desert warfare in the Middle East, far from its naval roots. Now that the US has largely withdrawn from this part of the world, it is remaking itself to meet future challenges. In short, it is going back to sea.
In 2018, the Pentagon engaged in a ground-up rethink of its mission. It concluded that “great power competition with China and Russia” would become its primary mission. The consequences are earth-shaking for both the USMC and the country as a whole.
The emergence of high-precision Chinese long-range missiles has rendered an American WWII style dominance of the Western Pacific by our ten aircraft carriers obsolete. These massive, majestic ships manned by 5,000 men each have become white elephants and liabilities in future warfare.
They will be replaced by fast-moving commando-type companies of 50-150 Marines moving atoll to island and bottling up the Chinese Navy with high tech drones, rockets, and anti-ship missiles. The traditional 12-man rifle company platoon is gone. The costly carriers will be reduced to safer support roles thousands of miles at sea.
The implications for the USMC are far-reaching. General David H. Berger, the gentleman who sent me to Guadalcanal, has proposed cutting the Corps from 186,000 to 170,000 men. He will eliminate most artillery, all tanks, and cut the number of F-35 fighters by 30%. The new structure would be designed to work anywhere in the world at a moment’s notice. You can never predict the next crisis, so you have to prepared for all contingencies.
During my reserve days, I once commanded a Marine tank battalion on maneuvers. The indestructible M-1 Abrams tanks were powered by turbine engines, possessed a faultless laser sighting system, and drove like a Cadillac right of the assembly line over the cruelest desert terrain.
But at 50 tons each, they are hard to move around in a hurry. During Desert Shield and Desert Storm, we had to enlist a coal-fired WWII mothball fleet to get them to Saudi Arabia and even that took six months.
As for the 155 mm howitzer, they have been outmoded since WWII. All-weather Boeing AH64D Apache Longbow helicopters are far more mobile and effective and can refuel air to air. But every weapons system breeds its own constituency. Everyone agrees with me except artillerymen.
In the end, it will be politics that determines the future of the Marine Corps. Constancies fight bitterly to hold on to antiquated weapons system to preserve jobs. I remember that during Desert Storm, a Florida congressman fought tooth and nail to keep a massive Humvee contract even though with no armor, they were helpless against IEDs. Hundreds of Marines died as a result.
The same will be true for M1 tanks built in Ohio, the F-35 Lightning II manufactured in Texas, and nuclear-powered aircraft carriers in Virginia.
Notice these are all battleground states in this election. How you vote may determine where I next serve. So, vote carefully.
To participate in the discussion of our future national defense, please click here.
Semper Fidelis.
An Old Marine on Guadalcanal
“By the time you spot a bandwagon, it is too late to get on,” said Sir Martin Franklin, co-chairman of the APi Group.
