Mad Hedge Technology Letter
August 17, 2020
Fiat Lux
Featured Trade:
(U.S. STYMIES THE ADVANCEMENT OF FOREIGN BAD ACTORS)
(BABA), (AAPL), (IQ), (NFLX), (FB), (GOOGL), (AMZN)
Stay away from Chinese tech companies listed on the U.S. exchanges. I wouldn’t touch them with a 10-foot pole.
Not only are these firms unscrupulous, but the U.S. administration is specifically attacking them as a cornerstone campaign strategy as we close in on the November election.
The blitzkrieg has been increasing at a rapid clip with U.S. President Donald Trump banning social media asset TikTok and chat app WeChat.
Just in the last few hours, the U.S. administration has said they are also “looking at” going after Chinese eCommerce firm Alibaba (BABA) who is the Chinese Amazon.
If the trends continue, there could be no Chinese tech companies freely extracting American revenue by this November.
Things will only get worse.
No doubt the coronavirus fiasco has exacerbated tensions between the countries with both sides dealing with a plunging economy.
The only reason we do not hear about the depths of despair going on in the Chinese economy is because the media is suppressed there.
Chinese media is tightly controlled disabling any negative news that shines an unfavorable light on the Chinese communist party.
Then there is the immoral fraud aspect of Chinese tech companies as every mainland Chinese firm wishes to go public in New York because company financials are never audited, and they are immune from any criminal liability.
This is a recipe to enable reckless Chinese management who state opaque numbers in their financials in the hope that American investors will take the bait.
Another cheater has been unearthed by Wolfpack Research who along with Muddy Waters have made it their mission to root out the bad actors.
The supposed “Netflix (NFLX) of China” Chinese streaming service iQiyi (IQ) plunged in after-hours trade in the U.S. after it announced the Securities and Exchange Commission (SEC) has launched a probe into the company.
The case revolves around iQiyi falsifying their subscription numbers which everyone knows is the key to exhibiting growth in the company.
iQiyi said the SEC is “seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020.”
Wolfpack Research has accused iQiyi of inflating 2019 revenue by around 44%.
Wolfpack also said iQiyi artificially overexaggerated expenses among other data.
The SEC probe into iQiyi comes amid rising scrutiny on U.S.-listed Chinese companies following the Luckin Coffee debacle in which they committed the same act of falsifying numbers.
This copycat crime is clearly seen as a big winner in Mainland China encouraging a slew of companies to decide on the same strategy.
The Coffee company admitted to fabricating sales numbers for 2019. The company was subsequently delisted from the Nasdaq in June.
China and its tech firms are one of the few bipartisan issues with strong support from both sides of the aisle and I can only see the temperature in the kitchen getting hotter.
The side effect of purging the Chinese tech out of the U.S. is that it bolsters the investor case for American tech.
Not that they needed help in the first place.
If the government won’t allow foreign companies to compete with Silicon Valley, then the monopolies built by the likes of Apple (AAPL), Facebook (FB), Google (GOOGL), and Amazon (AMZN) will feel protected because of the government effectively widening their moats.
One might argue that the crimes these American companies have committed are just as bad as the Chinese firms, but they get a free pass for being American.
Remember this is the age of de-globalization with national governments protecting national companies and not the other way around.
Silicon Valley companies have tried to pervert the U.S. employment situation by maneuvering around U.S. nationals by applying for the foreign HB-1 visas in droves and underpaying mostly Chinese and Indian nationals to work for the likes of Google and Facebook.
We can’t say these Silicon Valley companies are saints. They certainly are not, but that doesn’t matter in today’s climate when government, billionaires, and tech moguls are assumed as scum from the get-go.
Then there is the personal data issue that can’t be said to be much better than what the Chinese companies are doing.
The double standard is not surprising, and a heavy dose of politics has been injected into the global tech ecosphere to the detriment of cross border trade.
In the fog of war, this is why I have largely focused on U.S. software companies with subscription revenue because it offers more visibility than an unstable revenue model like Uber or Lyft.
In any case, nobody can blame the U.S. government for going this route since, after all, Facebook, Google, Amazon, and Netflix are all banned in China as well.
You don’t see U.S. tech companies trading on the Shenzhen tech index for a reason and after this monster run-up from the March nadir, it’s obvious why Chinese tech firms want to keep that funnel to U.S. investor capital clear.
This series of events that effectively coddles American big tech will insulate them from any real share weakness. The trend is your friend and I am bullish on American big tech.
“I don't think of Apple as a stock. I think of it as our third business.” – Said Legendary U.S. Investor Warren Buffet
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
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 17, 2020
Fiat Lux
Featured Trade:
(JOIN THE AUGUST 24-26 MAD HEDGE TRADERS & INVESTORS SUMMIT),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME BACK FROM YOUR CRUISE),
(INDU), (TLT), (GLD), (TBT), (FB), (AMZN), (AAPL), (BAC), (JPM)
I have long advocated a long cruise as the best of all long-term investment strategies. After all, over the past 100 years, stocks have gone up 80% of the time, including the last Great Depression and WWII. Almost all news is negative, so ignoring should boost your investment returns immensely.
The last six months offer the most recent example. If you had departed on February 14 and return on Friday, August 14, the index return would have been absolutely zero, but you would have collected 1% in dividends. If you had been overweight in technology and biotech stocks, as I have been advocating for the past decade, you would have been up 20-30%.
Of course, this year, cruising presented its own risks, not from a sinking ship, pirates, or the norovirus, but from Covid-19. Many guests departed in the best of spirits to return DOA in the ship’s overcrowded meat locker.
The stock markets are offering more than the usual amount of risks as well. Think of an irresistible force, massive liquidity, meeting the immovable object, record-high valuations.
Only action in Washington could break this stalemate to the upside, a deal between the House and the White House that brings yet another stimulus package. Most of whatever money gets approved will head straight for the stock market, either directly or indirectly. Until then, we will be trapped in a narrow range.
These conditions could last into September, or until after the election. Nobody knows. That’s why eight of my nine positions expire on Friday, in four trading days.
Trump took executive action to help the economy but offers not a penny in funding. He expects states running record deficits to pay for a big chunk. It’s a symbolic act that will have no impact on the economy. The bottom line is no more stimulus for the economy. Stocks will hate it. Trump fiddles while America burns.
A bond market collapse is imminent, with record new issuance in the coming week and a strong July Nonfarm Payroll Report last Friday. Expect ten-year Treasury yields to go back to 0.95% and prices to collapse. Inflation is ticking up, with Consumer prices rising to 1.6% YOY. Fed buying of $80 billion a month is already in the price. I am selling short the (TLT).
Warren Buffet was a major buyer of His own stock, picking up a record $5.1 billion worth of Berkshire Hathaway (BRK/B). With $146.6 billion in cash on hand, what else is he going to do? Berkshire Class A shares were down 7.4% for the year through Friday’s close, compared with the 3.7% gain in the S&P 500. It’s his way of betting on the long-term future of industrial America at a discount.
Russia claimed Covid-19 Vaccine, causing stocks to pop. The rotation trade continues with a vengeance, with tech (I’m short), bonds (I’m short), and gold down big and “recovery” stocks like cruise lines, hotels, restaurants, and banks (I’m long) on a tear. Some $5 trillion in cash is pouring in from the sidelines, so there is only “UP” and “UP BIG”. (SPY) hit a new all-time high.
Tesla announced 5:1 stock split on August 21, which is the options expiration day. Long expected, it is just the latest in a series of Elon Musk attacks against the shorts, of which I am now one. The shares are up only 7% on the announcement. The impact won’t be so great, as it only takes the shares back to where they were in March.
Biden picked Kamela Harris as VP. It is the safe choice, not that California was ever in doubt in the electoral college. A moderate choice clearly takes aim at the conservative Midwest. Markets will rally because she is not Elisabeth Warren, who would have pilloried the banks and big tech and is essentially anti-capitalist.
College Football is postponed for 2020-2012, delivering a $4 billion hit to sponsoring colleges and another drag on GDP. No more free Corvettes for USC players. It's another example of local government taking the lead on Corona measures where the federal government is totally absent.
Van Eck targets $3,400 for gold. One of the original players in gold mutual funds who I know from the big bull market during the 1970s sees a 72% increase in the barbarous relic coming. With the government running the printing presses 24/7 to end the Great Depression collapsing the US dollar, it’s a no-brainer.
Consumer Prices unexpectedly jump, up 0.6% in July and 1.6% YOY. It’s a legitimate “green shoot” and provided yet another reason for the recovery trade. Rebounding inflation is always a great time to be short the US Treasury bond market (TLT). Keep selling every rally in the (TLT).
Retail Sales jump 1.2% in July, despite rising Corona cases, taking it back above pre-pandemic levels. Industrial Production picked up 3%. A lot was bought on credit. The problem is that all of those stimulus and unemployment dollars are now gone. In the meantime, further aid is frozen in Washington. No shopping, no growth.
Weekly Jobless Claims drop below one million for the first time since March. It’s still terrible, but it’s progress. Take what you can get. However, the rate of decline is flagging, and the next report could well bring an upturn.
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.
Nothing refreshes and clears the mind like a vacation.
As a result, my Global Trading Dispatch blasted through to a substantial new all-time high. August is running at a blistering 6.03%, delivering a 2020 year to date of 34.66%, versus -2.00% for the Dow Average. That takes my eleven-year average annualized performance to a new all-time high of 36.61%. My 11-year total return has rocketed to 390.57%.
It certainly helped being short big tech (AAPL), (AMZN), (FB), short US Treasury bonds (TLT), (TBT), long banks (JPM), (BAC), and long gold (GLD).
The only numbers that count for the market are the number of US Corona virus cases and deaths, which you can find here.
On Monday, August 17 at 8:30 AM EST, the August New York Empire State Manufacturing Index is published.
On Tuesday, August 18 at 8:30 AM EST, Housing Starts for July are released.
On Wednesday, August 19 at 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, August 20 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, August 14, at 10:00 AM EST, Existing Home Sales for July are printed. At 2:00 PM The Bakers Hughes Rig Count is released.
As for me, with six days of 100-degree temperatures forecast, I attempted to go to the beach. A car crash on the Richmond Bridge trapped me in traffic for an hour. By the time I made it to the coast, the beaches were unreachable, thanks to unprecedented crowding.
With the local real unemployment rate at 25%, people have a lot of free time on their hands these days. It’s all part of the times we live in.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Technology Letter
August 14, 2020
Fiat Lux
Featured Trade:
(BIG TECH AND THE FUTURE OF COLLEGE CAMPUSES)
(SPG), (AMZN), (APPL), (MSFT), (FB), (GOOGL)
The genie is out of the bottle and things will never go back to how they once were. Sorry to burst your bubble if you thought the economy, society, and travel rules would just revert to the pre-coronavirus status quo.
They certainly will not.
One trend that shows no signs of abating is the “winner take all” mentality of the tech industry.
Tech giants will apply their huge relative gains to gut different industries.
Once a shark smells blood, they go in for the kill; and nothing else will suffice until these revenue machines get their way in every other adjacent industry.
Recently, we got clarity on big box malls becoming the new tech fulfillment centers with the largest mall operator in the United States, Simon Property Group (SPG), signaling they are willing to convert space leftover in malls from Sears and J.C. Penny.
Then I realized that another bombshell would hit sooner rather than later.
College campuses will become the newest of the new Amazon, Walmart, or Target eCommerce fulfillment centers starting this fall, and let me explain to you why.
When the California state college system shut down its campuses and moved classes online due to the coronavirus in March, rising sophomore Jose Garcia returned home to Vallejo, California where he expected to finish his classes and hang out with friends and family.
Then Amazon announced plans to fill 100,000 positions across the U.S at fulfillment and distribution centers to handle the surge of online orders. A month later, the company said it needed another 75,000 positions just to keep up with demand. More than 1,000 of those jobs were added at the five local fulfillment centers. Amazon also announced it would raise the minimum wage from $15 to $17 per hour through the end of April.
Garcia, a marketing and communications major, applied and was hired right away to work in the fulfillment center near Vallejo that mostly services the greater Bay Area. He was thrilled to earn extra spending money while he was home and doing his schoolwork online.
This is just the first wave of hiring for these fulfillment center jobs, and there will be a second, third, and fourth wave as eCommerce volumes have exploded. Even college students desperate for the cash might quit academics to focus on starting from the bottom in Amazon.
Even though many of these jobs at Amazon fulfillment centers aren’t those corner office job that Ivy League graduates covet, in an economy that has had the bottom fall out from underneath, any job will do.
Chronic unemployment will be around for a while and jobs will be in short supply.
When you marry that up with the boom in ecommerce, then there is an obvious need for more ecommerce fulfillment centers and college campuses would serve as the perfect launching spot for this endeavor.
The rise of ecommerce has happened at a time when the cost of a college education has risen by 250% and, more often than not, doesn’t live up to the hype it sells.
Many fresh graduates are mired in $100,000 plus debt burdens that prevent them from getting a foothold on the property ladder and delays household formation.
Then consider that many of the 1000s of colleges that dot America have borrowed capital to the hills building glitzy business schools and rewarding the entrenched bureaucrats at the school management level outrageous compensation packages.
The cost of tuition has risen by 250% in a generation, but has the quality of education risen 250% during the same time as well?
The answer is a resounding no, and there is a huge reckoning about to happen in the world of college finances.
America will be saddled with scores of colleges and universities shutting down because they can’t meet their debt obligations.
Not to mention the financial profiles of the prospective students have dipped by 50% or more in the short-term with their parents unable to find the money to send their kids to college.
Then there is the international element here with the lucrative Chinese student that added up to 500,000 total students attending American universities in the past.
They won’t come back after observing how America basically shunned the pandemic and the U.S. public health system couldn’t get out of the way of themselves after the virus was heavily politicized on a national level.
The college campuses will be carcasses with mammoth buildings ideal to be transformed into eCommerce inventory centers.
The perfect storm is hitting on every side for Mr. Jeff Bezos to go in and pick up a bunch of empty college campuses for pennies on the dollar as the new Amazon fulfillment centers.
This will happen as the school year starts and schools realize they have no pathway forward and look to liquidate their assets.
Defaults will happen by the handful in the fall, while some won’t even open at all because too many students have quit.
Then the next question we should ask is: will a student want to pay $50,000 in tuition to attend online Zoom classes for a year?
My guess is another resounding no.
By next spring, there will be a meaningful level of these college campuses that are repurposed, as eCommerce delivery centers with the best candidates being near big metropolitan cities that have protected white collar jobs the best.
The coronavirus has exposed the American college system, b as university administrators assumed that tuition would never go down.
Not every college has a $40 billion endowment fund like Harvard to withstand today’s financial apocalypse.
It’s common for colleges to have too many administrators and many on multimillion-dollar packages.
These school administrators made a bet that American families would forever burden themselves with the rise in tuition prices just as the importance of a college degree has never been at a lower ebb.
Like many precarious industries such as college football, commercial real estate, hospitality, and suburban malls, college campuses are now next on the chopping block.
Big tech not only will make these campuses optimized for delivery centers but also gradually dive deep into the realm of educational revenue, hellbent on hijacking it from the schools themselves as curriculum has essentially been digitized.
Colleges will now have to compete with the likes of Google (GOOGL), Facebook (FB), Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT) directly in terms of quality of digital content since they have lost their physical presence advantage now that students are away from campus.
Tech companies already have an army of programmers that in an instance could be rapidly deployed against the snail-like college system.
The only two industries now big enough to quench big tech’s insatiable appetite for devouring revenue is health care and education.
We are seeing this play out quickly, and once tech gets a foothold literally on campus, the rest of the colleges will be thrust into an existential crisis of epic proportions with the only survivors being the ones with large endowment funds.
It’s scary, isn’t it?
This is how tech has evolved in 2020, and the tech iteration of 2021 could be scarier and even more powerful than this year’s iteration. Imagine that!
AMAZON PACKAGES COULD BE DELIVERED FROM HERE SOON!