Mad Hedge Technology Letter
August 31, 2020
Fiat Lux
Featured Trade:
(WALMART’S QUEST TO BECOME THE NEXT AMAZON)
(WMT), (MSFT), (ORCL), (GOOGL), (AMZN)
U.S. tech is about to hit a 10-bagger when TikTok is set to choose between the Microsoft (MSFT)-Walmart hybrid offer or one from Oracle (ORCL) in the next 48 hours.
The network effect that will result from this purchase will be staggering and still underhyped in the mainstream media.
I am on record saying that Walmart is the new Fang, and their ambitions prove it.
Walmart (WMT) wanted to be the majority owner of TikTok, but the U.S. government wanted a technology company to be the lead investor.
I am not sure how that makes sense in an age where every company is a tech company.
Walmart was originally in a consortium with Google (GOOGL) before moving over in recent days to partner with Microsoft (MSFT) when it became clear the retailer would not be able to lead the deal.
Walmart is validating my thesis that it is a hybrid ecommerce company with its last earnings report 2 weeks ago.
In the company’s Q2 earnings, Walmart reported its U.S. ecommerce sales were up 97% — an increase attributed to more customers shopping online during the pandemic, stocking up on household supplies and shopping for grocery items online.
The TikTok deal first started with Walmart negotiating with SoftBank Chief Operating Officer Marcelo Claure.
SoftBank’s Claure believed Walmart’s all-American image and Google’s cloud computing infrastructure backbone could be a way in for the Japanese technology company.
The deal structure would have had Walmart as the lead buyer, with SoftBank and Alphabet acquiring minority stakes. One or two other minority holders held talks to join too but this ultimately was nixed by the U.S. government.
Walmart’s goal is to become the exclusive e-commerce and payments provider for TikTok and have access to user data to enhance those capabilities.
U.S. national security hawks need to save face by having a thoroughbred U.S. tech company lead the deal to show that this isn’t just about underhanded economic mercantilism.
Google could face significant antitrust opposition if it acquired TikTok’s U.S. assets.
Amazon is out of the picture too for anti-trust worries.
These concerns caused the consortium to crumble last week and led Walmart, which had become increasingly convinced that TikTok fits into its strategy, to partner with Microsoft on a bid instead.
TikTok is pondering which way to go – either the Microsoft-Walmart bid or a rival offer from Oracle. A deal, which is set to value TikTok’s U.S. operations in the $20 billion to $30 billion range, could be completed in the next 48 hours.
What does this mean for Walmart?
Walmart is hellbent on directly competing with Amazon prime for that same ecommerce market.
Walmart ecommerce sales now total more than $10 billion in quarterly U.S. ecommerce sales, exceeding 11.4% of the retail giant’s overall U.S. net sales for the first time.
The achievement reflects the ongoing shift toward online shopping amid the pandemic, and the increasingly fuzzy line between online and physical retail sales. It is also an example of the pandemic accelerating the shift to digital commerce at traditional brick-and-mortar retailers.
The timing isn’t a coincidence with Walmart on the verge of rolling out its own Amazon Prime service dubbed Walmart+.
Walmart’s new membership program is expected to cost $98/year, competing with Amazon’s $119/year Prime membership.
Amazon’s global online sales are 4.5X larger than Walmart’s at $45.9 billion for the quarter, up nearly 50%, and its physical retail sales were $3.8 billion, down 13% from the same period a year ago.
Walmart has significant headway to make before it comes close to Amazon Prime but there are fertile pastures in front of them, meaning I believe Walmart is a conviction buy at these levels.
At the bare minimum, this is a conspicuous sign of intent for Walmart that has successfully turned around the titanic and is a real time player in ecommerce.
They will be on the prowl for other tech purchases in the future as well as they certainly have the cash flow to pull the trigger on adding more tech talent to the lineup.
If Walmart reels in TikTok, I recommend long-term investors to buy Walmart as a tech growth asset and it is easily a $200 stock.
“The tailwinds we’re experiencing are accelerating our progress to build a healthier eCommerce busines as we add new brands, improve product mix, grow the marketplace and achieve more fixed-cost leverage.” – Said CEO of Walmart Doug McMillon
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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
August 31, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or A TALE OF FOUR CHARTS),
(NASD), (TLT), (GLD), (JPM), (FB), (AAPL), (AMZN), (TSLA)
Listening to 27 presentations during the Mad Hedge Traders & Investors Summit last week (click here for the replays), I couldn’t help but notice something very interesting, if not alarming.
All the charts are starting to look the same.
You would expect all the technology charts to be similar on top of the historic run we have seen since the March 23 bottom.
But I wasn’t only looking at technology stocks.
Analyzing the long-term charts for stock indexes, bonds, real estate, and gold, it is clear that they ALL entered identical parabolic moves that began during the notorious Christmas bottom in December 2018.
With the exception of the pandemic induced February-March hiccup this year, it has been straight up ever since.
The best strategy of all for the past three years has been to simply close your eyes and buy EVERYTHING and then forget about it. It really has been the perfect idiot’s market.
This isn’t supposed to happen.
Stocks, bonds, real estate, and gold are NEVER supposed to be going all in the same direction at the same time. The only time you see this is when the government is flooding the financial system with liquidity to artificially boost asset prices.
This latest liquidity wave started when the 2017 Trump tax bill initiated enormous government budget deficits from the get-go. It accelerated when the Federal Reserve backed off of quantitative tightening in mid-2019.
Then it really blew up to tidal wave proportions with the Fed liquidity explosion simultaneously on all fronts with the onset of the US Corona epidemic.
Asset classes have been going ballistic ever since.
From the March 23 bottom, NASDAQ is up an astounding 78%, bonds have gained an unprecedented 30%, the US Homebuilders ETF has rocketed a stagging 187%, and gold has picked up an eye-popping 26%.
That’s all well and good if you happen to be long these asset classes, as we have been advising clients for the past several months.
So, what happens next? After all, we are in the “What happens next?” business.
What if one of the charts starts to go the other way? Is gold a good hedge? Do bonds offer downside protection? Is there safety in home ownership?
Nope.
They all go down in unison, probably much faster than they went up. If fact, such a reversal may be only weeks or months away. If you live by the sword you die, by the sword.
Assets are now so dependent on excess liquidity that any threat to that liquidity could trigger a selloff of Biblical proportion, possibly worse than what we saw during February-March this year.
And you wouldn’t need simply a sudden tightening of liquidity to prompt such a debacle. A mere slowdown in the addition of new liquidity could bring Armageddon. The Fed in effect has turned all financial markets into a giant Ponzi scheme. The second they quit buying, they all crash.
The Fed and the US Treasury have already started executing this retreat surreptitiously through the back door. Some Treasury emergency loan programs were announced with a lot of fanfare but have yet to be drawn down in size because the standards are too tight.
The Fed has similarly shouted from the rooftops that they would be buying equity convertible bonds and ETFs but have yet to do so in any meaningful way.
If there is one saving grace for this bull market, it's that it may get a second lease on life with a new Biden administration. Now that the precedent for unlimited deficit spending has been set by Trump, it isn’t going to slow down anytime soon under the Democrats. It will simply get redirected.
One of the amazing things about the current administration is that they never launched a massive CCC type jobs program to employ millions in public works as Roosevelt did during the 1930s to end that Great Depression. Instead, they simply mailed out checks. Even my kids got checks, as they file their own tax returns to get a lower tax rate than mine.
I think you can count on Biden to move ahead with these kinds of bold, expansionist ideas to the benefit of the nation. We are still enjoying enormously the last round of such spending 85 years ago, the High Sierra trails I hiked weeks ago among them.
Stocks soared on plasma hopes. Trumps cited “political” reasons at the FDA for the extended delay. Scientists were holding back approval for fears plasma was either completely useless and would waste huge amounts of money or would kill off thousands of people. At best, plasma marginally reduces death rates for those already infected, but you’re that one it’s worth it. Anything that kills Covid-19 is great for stocks.
Existing Home Sales were up the most in history in July, gaining a staggering 24.7% to 5.86 million units. Bidding wars are rampant in the suburbs. Investors are back in too, accounting for 15% of sales. Inventories drop 21% to only 3.1 months. These are bubble type statistics. Can’t hold those Millennials back! This will be a lead sector in the market for the next decade. Buy homebuilders on dips.
Goldman said a quarter of job losses are permanent, as the economy is evolving so fast. Many of these jobs were on their way out before the pandemic. That could be good news for investors as those cost cuts are permanent, boosting profits. At least, that’s what stocks believe.
Hedge funds still love big tech, even though they are now at the 99th percentile of historic valuation ranges. Online financials, banks, and credit card processors also rank highly. Live by the sword, die by the sword.
Massive Zoom crash brought the world to a halt for two hours on Monday morning. It looked like a Chinese hack attack intended to delay online school opening of the new academic year. Unfortunately, it also delayed the start of the Mad Hedge Traders & Investors Summit.
The Dow Rebalancing is huge. Dow Jones rarely rejiggers the makeup of its famed but outdated index. But changing three names at once is unprecedented. One, Amgen (AMGN) I helped found, working on the team the discovered its original DNA sequencing. All of the founding investors departed yonks ago. The departure of Exxon (XOM) is a recognition that oil is a dying business and that the future is with Salesforce (CRM), whose management I know well. One big victim is Apple (AAPL) whose weighting in the index has shrunk.
The end of the airline industry has begun, with American (AAL) announcing 19,000 layoffs in October. That will bring to 40,000 job losses since the pandemic began. The industry will eventually shrink to a handful of government subsidized firms and some niche players. Avoid like a plat in a spiral dive.
30 million to be evicted in the coming months, as an additional stimulus bill stalls in Congress. It will no doubt be rolling evictions that stretch out over the next year. This will be the true cost of failing to deal with the virus.
When we come out 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 still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.
My Global Trading Dispatch suffered one of the worst weeks of the year, giving up most of its substantial August performance. If you trade for 50 years, occasionally you get a week like this. The good news is that it only takes us back to unchanged on the month.
Longs in banks (JPM) and gold (GLD) and shorts in Facebook (FB) and bonds (TLT) held up fine, but we paid through the nose with shorts in Apple (AAPL), Amazon (AMZN), and Tesla (TSLA).
That takes our 2020 year to date down to 26.56%, versus +0.05% for the Dow Average. That takes my eleven-year average annualized performance back to 35.58%. My 11-year total return retreated to 382.47%.
It is jobs week so we can expect a lot of fireworks on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, August 31 at 10:30 AM EST, the Dallas Fed Manufacturing Index for August is released.
On Tuesday, September 1 at 9:45 AM EST, the Markit Manufacturing Index for August is published.
On Wednesday, September 2, at 8:13 AM EST, the August ADP Employment Change Index for private-sector job is printed.
At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, September 3 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, September 4, at 8:30 AM EST, The August Nonfarm Payroll Report is released.
At 2:00 PM The Bakers Hughes Rig Count is released.
As for me, I’ll be catching up on my sleep after hosting 27 speakers from seven countries and entertaining a global audience of 10,000 from over 50 countries and all 50 US states. We managed to max out Zoom’s global conferencing software, and I am now one of their largest clients.
It was great catching up with old trading buddies from decades past to connect with the up-and-coming stars.
Questions were coming in hot and heavy from South Africa, Singapore, all five Australian states, the Persian Gulf States, Saudi Arabia, East Africa, and every corner of the United Kingdom. And I was handling it all from my simple $2,000 Apple laptop from nearby Silicon Valley.
It is so amazing to have lived to see the future!
To selectively listen to videos of any of the many talented speakers, you can click here.
See you there.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
August 28, 2020
Fiat Lux
Featured Trade:
(THE MISHAP OF THE CENTURY)
(AIRBNB)
The dumbest feeling person in tech right now has to be CEO and Co-Founder of Airbnb Brian Chesky.
The short-term accommodation platform was valued at $31 billion in its last funding round in 2017 and this year was the year that Chesky and Co. had earmarked to go public.
The company was the beneficiary of a secular tech tailwind aided by missteps from a dinosaur hotel industry and carved out a unique product linking hosts and travelers for the purpose of filling in short-term accommodation.
Skirting regulation was the cherry on top.
Airbnb pockets a commission of 6% of the total booking amount, meaning they are overwhelmingly reliant on volume to build sales.
There are more than 7 million homes in 220 countries and regions that have earned over $80 billion since the company started.
Like many things in life – a window of time is all you get.
Last year was that window of time when a smorgasbord of private tech unicorns delivered public markets new tradable assets such as Uber, Peloton, Pinterest, and Lyft.
Even though these stock shares performed worse than expected, it offered long time employees and shareholders a chance to finally cash in.
After going public, any loss from underperforming shares would be absorbed by the public.
Airbnb’s management even had enough time to observe ex-CEO of Uber Travis Kalanick sell off $1.7 billion in stock following the end of the company’s IPO lockup period highlighting the ample period of time Airbnb had to come to the public markets if they wanted to in 2019.
The 2019 loss of $322 million in the first nine months was no big deal and mainly attributed to ramping up marketing.
Then the coronavirus suddenly took the world by storm and everything changed.
Brian Chesky’s arrogance has cost his shareholders $20 billion.
What about the future?
The next “disruptor” of Airbnb could appear in 24 months as well – who knows?
Operations will cost more in 24 months and not less, and a healthy supply of units is not guaranteed to be the same if hosts mass foreclose on properties or a mirror image competitor who attempts to undercut Airbnb appears.
It is rumored that close to 1 out of 3 Airbnb hosts are reliant on their monthly Airbnb income to pay mortgages, which would suggest a poor formula in this type of souring economic climate.
This entire short-term rental industry buttressed by tech platforms could be due for a wholesale washout.
How bad is the situation now?
Airbnb took a hit to the tune of over $50 million in booking revenues over the past several weeks in strategic cities that are close to coronavirus hot zones.
The home-sharing startup’s booking revenues cratered across 17 key international cities over a span of five weeks starting at the beginning of February, and the pain isn’t over yet as cities and countries go into full-blown lockdowns and crisis mode.
At first, it was just China, whose Airbnb’s booking revenues dropped 25%, losing $17.6 million, but that was just the canary in the coalmine.
And that poor number comes in the context of expected growth of roughly plus $30 million if booking revenues had continued growing at the same pace of nearly 35% the firm saw in those markets over the same period last year.
In total, the China business registered a negative swing of nearly $48 million because of the virus.
Even though the virus originated in Wuhan, the contagion quickly spread to Shanghai, Beijing, Seoul, Singapore, Hong Kong and Tokyo wreaking havoc on Airbnb listings.
Western cities are going through the same barrage of Airbnb cancellations and non-bookings in the tourist meccas of Paris, London, Prague, Barcelona, Milan, Rome, and New York.
Airbnb has now enacted an extenuating circumstances policy allowing guests to cancel eligible reservations without charge, and the host is required to refund the reservation, irrespective of the previously contracted cancellation policy.
I unquestionably blame Chesky for the bleak situation Airbnb is grappling with in terms of bringing the company to public markets.
They secretly filed for an IPO in 2020 at only half the valuation Airbnb fetched pre-virus.
He failed to do what many unicorn leaders accomplished, which was, by hell or high water, transfer risk to the public market during the late innings of the economic cycle (or before) which we can almost convincingly say ended in January 2020.
Was it worth eking out the extra year or two of growth for another 10% “growth” of incremental value?
The greediness has been exposed and now briskly punished.
Now the company has no room for error while going into full-on damage control for the foreseeable future.
The economic mayhem has put a premium on tech companies with positive cash flow, high margins, competitive advantage, and profits.
A company like Microsoft perfectly illustrates this character set while Airbnb just clung onto its start-up growth model for too long when it easily had the chance to become profitable two years ago.
Avoid Airbnb shares when they hit the public markets – no need to care for damaged goods.
My bet is that ultimately, Google will use this crisis to steal Airbnb’s business and there is nothing they can do about it. They are in the process of developing a property rental platform eerily similar to Airbnb.
“The American dream, what we were taught was, grow up, own a car, own a house. I think that dream's completely changing. We were taught to keep up with the Joneses. Now we're sharing with the Joneses.” – Said CEO of Airbnb Brian Chesky
