“A market has never before come out of a recession with stocks at peak earnings multiples,” said Jonathan Golub, Chief Equity Strategist at Credit Suisse.
We received a convincing data point as to why we trade cloud companies and not the semiconductor chips.
The rift between blacklisted telecom equipment giant Huawei Technologies and the U.S. administration has had a dramatic side-effect on the business models of U.S. chip companies.
The U.S. commerce department now will require licenses for sales to Huawei of semiconductors made abroad with U.S. technology signaling more turbulent times ahead.
Huawei is the Chinese smartphone maker and telecom provider who has stolen intellectual property from the West and used mammoth subsidies funded by the Chinese communist party to build itself into one of the premier telecom equipment sellers and number two maker of smartphones in the world.
I seldom issue trade alerts on semiconductor chip companies because I’d rather not compete with the Chinese communist party and their capital funding capacity.
China is hellbent on subsidizing its own chip capacity as many Western chip companies are blocked from doing deals with them.
A recent example is the Chinese communist party injecting $2.25 billion into a Semiconductor Manufacturing International Corp. wafer plant to ramp up development in the sector.
To read about this, click here.
Exploiting the economic freedom and laws of the West has worked out perfectly for Chinese tech enabling them to develop juggernauts like Tencent and Baidu.
In fact, state-sponsored hacking of Western intellectual property is not considered a malicious activity in China.
There is the Chinese notion that everything is fair game in business and war and protecting company secrets falls on the shoulders of the cybersecurity sector.
To read more about the fallout in the West from China’s aggressive trade strategy, click here.
The concept that you should only blame yourself if you allow your secrets to get stolen prevails in China.
The consequences are impactful with U.S. chip companies suffering large drops in revenue without notice.
Leading up to the coronavirus, chip companies experienced a revenue slide of 12% in 2019 to $412 billion largely due to the trade war.
An example is Xilinx Inc. (XLNX) who will fire 7% of its workforce citing lower revenue from Huawei and delayed adoption of superfast 5G networks.
Along with the West getting smacked by the trade war, the ripple effect of increased uncertainty and guide-downs across the semiconductor supply stems from China’s economy being hit even worse than the U.S. economy.
There are no winners here and it will be a hard slog back from the nadir.
Either way, the sabre-rattling doesn’t stop here and each tweet and counterpunch will cause heightened volatility in chip shares.
Then consider that the existence of supply chains will most likely uproot, and we got indication of that type of activity with Taiwan Semiconductor’s (TSM) announcement to build a new chip factory in Phoenix.
To read more about this impactful deal then click here.
This would have never happened during prior administrations where all manufacturing was offshored to China.
As it stands, China has been circumventing existing U.S. law to clampdown chip sales by buying U.S. chips from 3rd party channels.
Once many of the supply chains come back, it will be almost impossible for Chinese to procure those same chips.
The Taiwan semiconductor manufacturing facility in Arizona will ultimately employ 1,600 high-tech workers.
Building is slated for 2021 with production targeted to begin in 2024.
Moving forward, the U.S. administration will make it implausible for many U.S. chip companies to offshore using the reasons of national security and domestic job demand to ensure that many factories are rerouted back to U.S. shores.
The boom and bust nature of chip companies make for treacherous spikes and drops in share prices.
The insane volatility is why I stay away from them as the Mad Hedge Technology Letter mainly opts for short-term options trades.
Nvidia (NVDA) and AMD (AMD) are great individual chip stocks that I would encourage readers to buy and hold.
Another option is to just park your money in the semi ETF VanEck Vectors Semiconductor ETF (SMH) or iShares PHLX Semiconductor ETF (SOXX).
On the flip side, cloud stock’s backbone of recurring monthly revenue is just too savory.
The constant cash flow with minimal international risk along with pristine balance sheets is what makes U.S. cloud companies top on the list of trade alert candidates.
That won’t stop anytime soon as the pandemic has offered us more conviction into the moat between cloud stocks and the rest of technology.
I apologize if I sound like a broken record, but I love my Akamai’s (AKAM) and DocuSign’s (DOCU), they have the growth portfolio that backs up my thesis.
Buy cloud stocks on the dip.
Global Market Comments
May 18, 2020
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE MARKET IS BRACKETED)
(SPY), (TLT), (VIX), (DIS)
We are all living the Bill Murray movie “Groundhog Day” over and over again. Every day seems to blend seamlessly into the next, ad infinitum.
I think it’s Monday, but I’m not sure. The stock market is open so that must mean it’s Monday to Friday. The trash goes out tomorrow, so it might be Tuesday. No, wait! CBS 60 Minutes was on last night, so it has to be Monday. Maybe.
When a Marine Corp 60mm mortar team zeros in on a target, it is said to be “bracketed.” No matter which way the enemy goes, he gets blown up.
The S&P 500 is now “bracketed”.
If it falls, the support of the free Fed put option kicks in to limit the damage via QE infinity. If the market tries to rally, it is capped by the worst economic data in history, last week joined by a new trade war with China.
Who is the enemy that gets destroyed in this military metaphor? Anyone betting on an imminent upside or downside breakout, especially those who are long the Volatility Index (VIX).
That means the thousands who follow the Mad Hedge Fund Trader have just been given a money-printing machine, a new rich uncle.
For every time the market rallies, you simply buy a vertical bear put option spread in the front month with strikes prices well outside the bracketed area as I did last week with (DIS). When it dives, you strap on vertical bull call spreads, as I did last week with the (DIS) and the (SPY). Then you laugh all the way to the bank.
We could be bracketed a long time. The early data from opening-up states is that consumers returning to stores only amounts to a ruinous 7% of pre-pandemic levels. That suggests the Unemployment Rate will soar to 30% or more before it peaks, exceeding the Great Depression apex. There are easily another 10 million that haven’t been counted yet because the state benefit processors are so slow.
However, as long as we are bracketed, I reckon I can make 10% a month, as I already have done from the Middle of April and in May.
It is not a riskless strategy.
The day an actual vaccine is announced, the market Dow Average could soar by 3,000 points in a day, wiping out the shorts. The White House has been declaring this on a daily basis. But until we get a vaccine the market believes, we will remain bracketed. That could take years, if ever.
Dr. Fauci triggered a 1,000-point market dive with his sobering analysis of the course of the pandemic in the coming months. Don’t count on going back to school in the fall.
No “V” for the economy, said the Fed. The job losses are a complete economic disaster that will take years to recover from. That’s the opinion of Minneapolis Federal Reserve Bank President Neel Kashkari. The president just said Corona deaths will reach 100,000. Buzzkill. Do you think the stock market will notice?
Fed funds futures are discounting negative interest rates in a year. They say they don’t want negative rates but may not have a choice. The markets may go there without them. The disruptions to the financial service will be enormous. Do you really want to pay the bank to deposit your hard-earned money?
Fed Governor Powell warns the worst is yet to come, and the need for more stimulus is paramount. However, negative interest rates which failed in Europe and Japan won’t work here either. The problem is rampant fear, not the overnight cost of funds.
Weekly Jobless Claims are still soaring, up 3 million on the week to 36.5 million. It’s going to get worse before it gets better. The Fed is targeting a peak of 36.5 million. Connecticut is the worst-performing state, California the best.
Stan Druckenmiller says stocks are the most overvalued in his career, says my former client, one of the best traders in the market. My friend David Tepper says they’re the most expensive since 1999. It may be splitting hairs, but how much do you want to own here? Keep those shorts!
Another death knell for US Treasury bonds (TLT) as the April budget deficit soars to $738 billion. That is an $8.85 trillion annual rate. Overissuance is about to destroy deflation big time.
Retail Sales collapse by 16.4%, the worst on record in another Great Depressionary data release. The stock market is starting to lean towards a view that the economy will take years to recover, not months. I’m somewhere in the middle.
A new trade war with China heats up, with the president banning more export items, especially chips for telecom giant Huawei. I guess our economy isn’t bad enough. Knock another few thousand off the Dow.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $0 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance had another fabulous week, up an awesome +11.26%, and blasting us up to a new eleven-year all-time high of 20%. It has been one of the most heroic performance comebacks of all time.
My aggressive short bond positions gave back some money on the ‘RISK OFF” posture for the week. However, we offset those losses and a lot more on longs in bonds and shorts in the (SPY) and Walt Disney (DIS).
That takes my 2020 YTD return up to +7.29%. That compares to a loss for the Dow Average of -16.89%. My trailing one-year return exploded to 48.47%. My eleven-year average annualized profit returned to +34.59%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, May 18 at 10:00 AM, the NAHB Housing Market Index for May is released.
On Tuesday, May 19 at 8:30 AM, US Housing Starts for April are printed. Home Depot (HD) and Walmart (WMT) report.
On Wednesday, May 20, at 10:30 AM, weekly EIA Crude Oil Stocks are published. Target (TGT) and Lowes (LOW) report.
On Thursday, May 21 at 8:30 AM, Weekly Jobless Claims are announced. NVIDIA (NVDA) reports.
On Friday, May 22, the Baker Hughes Rig Count follows at 2:00 PM. Alibaba (BABA) reports.
As for me, I am headed back up to Incline Village, NV, a town completely free of Covid-19. The village is thinking of barring entry to all non-residents. Maybe it’s the fresh air.
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
To understand the unintended consequences of the Fed’s helicopter money to U.S. capitalism, we can put a magnifying glass over Uber’s (UBER) recent takeover attempt of Grubhub (GRUB) as what’s in store for not only the tech sector but the wider public markets.
Zombie companies parade around Europe and Japan because of an era of low interest rates and cozy bank relationships that keep these companies from dying out.
To read more about Allianz Economic Advisor Mohamed El-Erian’s take on zombie companies – click here.
It’s not a surprise that Japan and Europe are highly unproductive, and innovation ceases to exist when capital is being tied up in marginal companies with management happy to let capital slosh about without adding extra added value.
I get it that the Fed is trying to “save” the wider U.S. economy by bringing out the bazookas and even by buying junk-graded debt which was once seen as heresy.
But what we have now are inferior companies that will never turn a profit masquerading as real companies that would be on life support if not for cheap capital.
In almost every instance, the only winners are the executive management who pillage the system and cash out when they are allowed to sell their stock.
U.S. Representative for Rhode Island David Cicilline hit the nail on the head when he described the fluid situation by focusing on two of the bad apples, saying “Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub — which has a history of exploiting local restaurants through deceptive tactics and extortionate fees — marks a new low in pandemic profiteering.”
Uber is a taxi service that undercompensates its highest expense – the driver, and Grubhub delivers restaurant food but rips off the restaurants in doing it.
I defined exorbitant delivery fees as up to 40% which Grubhub is infamous for charging.
Yes, even with predatory practices, they cannot turn a profit.
Now, in this new normal of coronavirus, it would be a miracle to make any operational headway.
Uber’s attempted market grab is a giant red flag.
My guess is that they are doing this in order to jazz up the balance sheet and concoct some ridiculous new metric showing a pathway to growth.
By adding growth to revenue, Uber would be able to preach “growth” even if it’s of bad quality.
I thought the tech market was done looking through to grow by essentially killing off the “WeWork model.”
However, Uber is going for a model that is one notch above that model and repurposing it as something actually meaningful, which of course, it’s not.
They are already in litigious hell regarding driver’s remuneration, and that will not die down and could even destroy Uber.
Uber has in fact ignored California state orders to reclassify its drivers as employees and have appealed the court’s decision.
The New York state government has validated my theory of these fly-by-night delivery outfits being a net negative for business and society.
The New York City Council compared food ordering apps Grubhub and UberEats to blood-sucking parasites this week before passing emergency legislation aimed at helping struggling restaurants lower delivery costs during a precarious time.
During the state of emergency, a new vote passed capping food ordering and delivery app fees at 15% in delivery fees and 5% “other” takeout order fees.
To read more about this decision by the New York City Council – click here.
This was done to give some power back to the restaurants that have been getting fleeced.
The balance sheet shows the whole story with Uber’s net loss totaling more than $8.5 billion in 2019 and in February, they reported a net loss of $1.1 billion in the fourth quarter.
Let me remind readers that Grubhub posted a net income loss of $27.7 million for the last reported quarter as well.
As it turned out, Grubhub rejected Uber’s offer believing it didn’t meet their valuation of the company.
It would appear natural that a predatory company with no competitive advantage would set a market premium that would align with their borderline extortionate ways.
Do not own either one of these companies – there are far better ones out there in tech and no need to scrounge at the bottom of the barrel.
Monthly Grubhub bill for Chicago Pizza Boss During the Epidemic
Global Market Comments
May 15, 2020
(WHY CONSUMER STAPLES ARE DYING),
(XLP), (PG), (PEP), (PM), (WMT), (AMZN),
(WHY YOUR OTHER INVESTMENT NEWSLETTER IS SO DANGEROUS)
“If we are just going to argue about how much money we can burn to stay warm while the heater is broken, the unemployment rate is going to come down only 1.5% a year, said
said economist Austin Goolsby.
Global Market Comments
May 14, 2020
(TEN UGLY MESSAGES FROM THE BOND MARKET),
(TLT), (TBT), (USO), (GLD), (GS), (SPY)
The global bond markets have been screaming an ugly message at us loud and clear, and I’m afraid that it’s not a positive one.
Amazingly, US Treasury bonds have soared early this year, taking the (TLT) up a stunning 40 points.
In the meantime, stocks have suffered the sharpest crash in history, plunging ten times faster than the worst days of the 1929 crash, down 37%.
The implications for your investment portfolio are so momentous and far-reaching that I am going to have to list them one by one.
Read them and weep:
1) The US is in a severe depression.
2) The pandemic is not even close to ending. US deaths topped 85,000 yesterday and may triple from here.
3) The presidential election has become a major source of instability, and no one has any idea of how this will all end. Trump is currently trying to bankrupt the US Post Office to frustrate mail-in voting.
4) The immigration crisis is reaching a humanitarian crisis of epic proportions. It has become our Syria, which landed four million immigrants in Europe.
5) The stock market is in the process of crashing…. Again, failing dramatically at the 200-day moving average. That “Sell in May” thing may work big time this year.
6) The Trump trade is toast. Financials, commodity, energy, coal, and industrial stocks are leading the charge to the downside.
7) Oil (USO) is in free fall and may go negative again, another classic recession predictor. For the first time in history. Most small and medium-sized energy companies will go under. Coal has dropped to a historic low of 19% of US electricity production, less than total alternative sources, and is never coming back.
8) Bitcoin is rocketing, up an eye-popping 100% since the crash began. This has become the big hot money trade of 2020 in addition to that other great flight to safety trade, gold (GLD).
9) The US dollar (UUP) is flatlining, wiping out the growth of the foreign earnings of US multinationals. Foreign economies are collapsing even faster than ours, taking their interest rates and currencies lower at warp speed.
10) The unemployment rate, now at all-time lows, not bottom out for months. The great irony here is that while the president vociferously campaigned on an aggressive jobs program, he may well preside over the biggest job losses in history. The Fed is targeting total unemployment of 52 million, worst than the Great Depression.
For more on this, please read my recent piece, “Why You Will Lose Your Job in the Next Five Years and What to Do About It” by clicking here.
There is another alternative explanation to all of this.
A certain Monty Python sketch about a parrot comes to mind.
That all we saw a giant short squeeze in the hedge funds’ core short position in bonds for the umpteenth time, and that we are almost done.
Hedge funds have grown in size to where they are now the perfect contrary market indicator. It is the classic “Too many people in one side of the canoe” trade. A Yogi Berra quote comes to mind; “Nobody goes there anymore because it is too crowded.”
There are other structural factors at play here which are hard to beat. For more on this, please read my opus on “Why Are Bond Yields So Low” by clicking here.
Long Bonds are About to Take a Chainsaw to Your Portfolio
There certainly will be crippling longer-term implications for the airline industry, hotel chains, and of course hospitality – but I can’t say the same for online learning platform Chegg (CHGG), which is now a great option if you’re looking for tech stocks to invest in.
Chegg, is a U.S. education technology company based in Santa Clara, California who has hit pay dirt with this coronavirus epidemic.
Chegg provides digital textbook rentals, online tutoring, and other digital student services.
Schools around the U.S. and the world closed in an effort to slow the spread of the coronavirus as well as protecting our future leaders.
Despite the domestic economy on the verge of reopening, it is unclear when schools will.
Naturally, parents are also afraid to allow their children in a school environment where bacteria and germs act as a giant petri dish.
To read more about how schools are having a heck of a time reopening, click here.
Digital learning was already becoming part of the playbook, as college costs continued to soar unabated.
A rule of thumb in every industry is that a crisis often accelerates the inevitable and that is what I see happening in higher education.
Chegg is a portmanteau of the words chicken and egg and references the founders’ unenviable experience of being unable to obtain a job without experience while being unable to acquire experience without a job like many young graduates complain about.
With that in mind, the founders of Chegg, Aayush Phumbhra, Osman Rashid, and Josh Carlson, aspired to disrupt the textbook industry.
Business grew fast in the early stages – the company adjusted its business model to reflect that of Netflix’s then rental-based model, concentrating on renting textbooks to students in 2007.
Eventually, the growth led into a textbook rental partnership with education mainstay Pearson Education.
Fast forward to today and Chegg’s stock chart looks like a hockey stick with shares going from $30 to $64 in 2 months.
Chegg’s first quarter revenue jumped 35%, with its services sales up 33% to account for 76% of its total revenue.
The firm also saw the number of Chegg Services subscribers surge 35% to over 3 million for the first time.
And the company forecasted that the momentum it experienced at the end of the first quarter will carry over into Q2, with it calling for its “Q2 subscriber growth to be greater than 45%.”
The substantial increase in engagement from existing subscribers is following through into a meaningful increase in the take rate of the new Chegg Study Pack, much earlier than expected.
Chegg Study Pack is a three-in-one package that bundles together Chegg Study, Chegg Math Solver, and EasyBib Plus. To understand more about the Chegg Study Pack and Chegg’s other online learning products, click here.
Chegg did not provide guidance for the second half of 2020 due to many unknowns such as school start dates, enrollment trends, and whether schools will be taught on-campus, online, or both.
The pain doesn’t stop with the toddler, what about the young adults?
The Graduating Class of 2020 is confronted with the worst hiring climate in history that has seen rescinded internships and evaporating job offers.
These students might back out of the job market completely before they get a sniff and elect to attend graduate school, meaning more online learning in the short-term.
To read about the hardships for fresh graduates, click here.
I am encouraged by Chegg’s strong trends 1Q into 2Q and the broader shift of higher education in Chegg’s wheelhouse, whether done on or off-campus.
Investors are focused on firms that can grow during semi-apocalyptic conditions, especially ones that seem poised for longer-term expansion within a future-looking industry like Chegg.
Meanwhile, Chegg’s adjusted second quarter earnings are expected to explode to 48% and EPS at $0.34 a share. Overall, the company’s adjusted fiscal year EPS figures are projected to surge to 33% and 22%, respectively.
Shares are overheated for the time being and readers should wait for a significant dip in shares as we approach the summer.
Buy that dip because remote learning is here to stay and first movers like Chegg will have staying power with their sticky products.
With the gains concentrated in biggest names in the Nasdaq, there is a sprinkling of uber growth names of the likes of Chegg, Docusign, Datadog, and Teladoc that are outperforming by an order of magnitude.
The issue I have with smaller cap tech stocks right now is that large cap tech stocks have durability because of balance sheet strength.
If there is a sell-off, investors will migrate further up the food chain, meaning FANGs.
As the FANGs make new highs, they continue to reward long-term investors paying a high premium of a future increase in cash flow.
Lastly, FANGs are the biggest beneficiary of the rerating of the tech market after the unprecedented surge of Fed helicopter money.
Sadly, the smaller caps do not get the lions’ share of the Fed funding funneled into its shares.
The bottom line is that the dreaded coronavirus is mutating from its original version, and this iteration has been reported to affect children.
To read about the virus mutation, please click here.
The reopening of schools is going to be staggered, expensive, unfair, and controversial in the best-case scenario.
It’s impossible to envision that students won’t be given a huge dose of Chegg’s digital learning products and even though not a FANG, the secular tailwinds in Chegg are too powerful to ignore, making it again, one of the good tech stocks to invest in.
I am bullish Chegg (CHGG).