Mad Hedge Technology Letter
September 14, 2020
Fiat Lux
Featured Trade:
(THOUGHTS ON THE FUTURE OF U.S. TECH)
(AMZN), (GOOGL), (FB), (AAPL)
The world, technology, and U.S. economy are rapidly approaching a paradigm shift and investors will need to keep their finger on the pulse to adjust and adapt to the new normal.
This tech letter is about a recent note from Deutsche Bank that landed in my inbox and the contents are so pertinent that I must address it and what it means for the U.S. tech sector.
The note essentially said that the “era of globalization” is over and hunker down for the “age of disorder” where millennials are disenfranchised, poor, and largely disconnected from the financial benefits mostly harvested by the boomer generation.
The coronavirus has woken up the sleeping giant of Americas’ youth - they have come to grips that even though they use the flashy apps of Facebook (FB), Google (GOOGL), Amazon (AMZN) on their shiny Apple (AAPL) iPhone, they don’t exactly build wealth from these companies.
In fact, it’s the other way around.
According to Deutsche Bank, the next step in the development of the U.S. tech sphere is taking “revenge and redistributing wealth” from the old to the young.
The bottoming of tech stocks in March and the explosive price action have mainly benefited the shareholders who are from an older cohort and then the hardest hit was the youngest.
As Millennials start to grow in to positions of power, inheriting Apple or Amazon stock will most likely become costlier because the inheritance tax could balloon.
Boomers who mostly hold Congress seats have also stonewalled regulation on tech.
Tech, in fact, has the least amount of regulation out of any industry in the U.S. and nothing has been done to stop them from building up ironclad monopolies.
This could culminate in not only a tech tax on realized gains, but REAL regulation that won’t happen until political power is shifted over to the Millennials.
Climate change has been wreaking havoc in the Western region of the United States, but Deutsche Bank says that an even greater risk is the “intergenerational conflicts” that are about to explode.
The truth is that many young people feel alienated and stifled by the status quo as if the “establishment” is the only group in the U.S. that has benefited.
According to Deutsche Bank, Millennials also feel that the government is only working for corporations and the “elite.”
This data also doesn’t necessarily pinpoint one racial or ethnic group in the Millennial category but is a broad analysis that cuts across all shades of the spectrum.
As of July 2020, 52% of millennials were living in their parents’ home, up from 47% in February, according to the Pew analysis of Census Bureau data.
Young people simply cannot afford to live independently now.
If this power pivot does take place, corporate taxes will meaningfully go up, irrespective of what Biden does if he gets elected, and that is terrible news for the likes of Facebook, Google, Amazon, Apple, Microsoft, and so on.
These “redistributive policies” will be seen as a desperate act of saving Millennial’s financial lives as the increasing debt load will exacerbate inflation, meaning it will be more expensive each day to be an American wielding a weakening dollar.
The group of 7 big cap tech stocks will have to adjust to these new conditions, and clearly the riskiest company is Facebook who has been overstepping data privacy laws and destroying democracy for years.
These issues will finally be addressed when Millennials age into power.
Millennials are sure to take a hatchet to Boomers' pension benefits as the debt built up will need to be repaid and cuts along the financial chain must be accepted to the detriment of Boomers' inheritance plans.
It appears as if making money hand over fist, that mostly the Boomers enjoyed, will certainly be tested moving forward.
As the world quickly deglobalizes, tech companies won’t be able to outsource semi chips to Taiwan and assemble devices in China on the cheap.
These strategies must move inward and locally to support American jobs.
The inquest is out, and unfettered globalization and capitalism have been handed a guilty verdict by the Millennial generation.
The deeper ramification is that unfettered asset appreciation will likely be a relic of the past.
If you look at these tech charts, they basically appreciate in a straight line. Get ready for more zig-zags, and if regulation hits hard, we could also be facing zeroes in certain strategic tech firms.
Honestly, a company like Facebook doesn’t produce anything and is overvalued for it.
Then there is the issue of whether Millennials are content on the ever-growing problem of financing zombie companies that now comprise 37% of the S&P because of artificially low-interest rates.
Fed Governors like Jerome Powell will soon become obsolete and blamed in the history books for recklessness.
I define zombie companies as companies that cannot even pay back interest on debt let alone principal payments.
These companies are a serious drag on innovation because they perpetually fund companies that should not exist adding to the debt load.
The artificially low rates have boosted tech shares and broader markets for years along with the Trump corporate tax cut.
Buybacks will eventually become illegal because of the conflict of interests.
Just take a look at the big airlines whose management milked the cash cow and left the rainy-day fund barren to only get bailed out billions of dollars.
That won’t happen again.
Corporate funding will get significantly harder in the next year of corporate America. Investors should take note that management is rushing to capital markets to get every last penny of funding before the election because terms of financing could sour quickly in November.
US and China geopolitical relations will worsen and we are already seeing it play out as China has notified the U.S. that they would prefer TikTok to be deleted instead of generating a sale.
All Chinese tech apps will be removed, and Chinese tech companies won’t be allowed to list on U.S. public exchanges.
Don’t expect anymore “Chinese investment” into Silicon Valley for the foreseeable future, and that goes for education where the Chinese Communist Party has bought off Harvard University for a $1 billion.
U.S. Millennials now must compete with the Chinese government who are glad to fund their zombie companies in a race to the bottom.
This doesn’t exactly scream a higher-quality life for future Millennials exacerbating the problem.
Climate change is on the verge of compounding from bad to worse as California is grappling with not only apocalyptic air quality but a pandemic.
Who knows the next time anyone will be able to go outside in California?
Do you think rolling blackouts will encourage tech start-ups to continue operations in California?
Computers and internet don’t function without electricity – someone should tell California Governor Gavin Newsom.
Tech startups will never happen in California again, likely catalyzing a renaissance in zero state income states with cheap property markets.
Ultimately, we are currently in the midst of a technology revolution with astonishing equity valuations reflecting expectations for serious disruption to the status quo.
Call it a bubble or whatever you want, but the fragility of this bubble is real and we only need one external event for a major correction.
Then there is the thorny issue of whether markets will flip out over negative interest rates if that actually happens.
The report goes on to say that there is a “bipolar standoff as both the US and China seek to prevent encirclement by the other. Companies that have embraced globalization will be stuck in the middle if relations sour as we fear.”
It’s clear to the naked eye that the prior strategy of “scaling” a tech company like Facebook and Apple just won’t work anymore because so many territories will be off-limits.
Creating the next unicorn will be that much harder as many of the tailwinds boosting tech the last 25 years are on the verge of winding down.
As we enter this transition stage, I expect one of the big tech companies to falter through regulation or some other black swan event.
These developments favor active tech stock managers who must recalibrate daily according to wild swings that we will experience.
Buckle up because this will be a wild ride.
“I'm as proud of what we don't do as I am of what we do.” – Said CEO of Apple Steve Jobs
Global Market Comments
September 14, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE 200-DAYS ARE IN PLAY),
($INDU), (SPX), (SPY), (AAPL), (AMZN),
(JPM), (C), (BAC), (GLD), (TLT), (TSLA)
Six months into the quarantine, I feel like I’ve been under house arrest with no visiting privileges. And if I go outside for even a few minutes, I have to inhale the equivalent of a pack of cigarettes as I am surrounded by three monster fires.
All I can say is that I’m getting a heck of a lot of work done.
We are in the middle of a 20-year move in the Dow Average from 6,500 to 120,000. We have just completed a fourfold move off the 2009 bottom. All that remains is to complete a second fourfold gain by 2030.
The move is being driven by hyper-accelerating technology on all fronts. The first half of this move was wrought with constant fear and disbelief. The second half will be viewed as a new “Golden Age” and a second “Roaring Twenties.” The euphoria of July and August were just a foretaste.
And here is the dilemma for all investors.
The Dow has just pulled back 6.1% from the all-time high of 29,300 to 27,500. Should you be buying here, keeping the eventual 120,000 target in mind? Or should you hold back and wait for 26,000, 25,000, or 24,000?
The risk is that if you lean out too far to grab the brass ring, you’ll fall off your horse. By getting too smart attempting to buy the bottom, you might miss the next 93,000 points.
And now, I’ll make your choice more complicated.
The president has recently whittled away at his deficit in the polls, however slightly, typical of the run-up to the November elections. That increases the uncertainty of the election outcome and increases market volatility (VIX). Ironically, the better Trump does, the lower stocks will fall. So, if you do hang out for the lower numbers you might actually get them, and then more.
That puts the 200-day moving averages in play, not only for the major indexes but for single stocks as well. That could take Apple (AAPL) from a high of $137 to $80, a Tesla down from a meteoric $500 to $300.
Hey, if this were easy, your cleaning lady would be doing this for a tiny fraction of the pay.
Did I just tell you the market may go up, down, or sideways? I sound like a broker.
The 200-day moving averages are definitely in play. The 200-day moving average for the Dow Average is 26,298, down an even 10% from the high for the year. The technology-heavy S&P 500 could fall as much as 14% to its 200-day at 3,097.
Don’t bet against the Fed as Tuesday’s 700-point rally in the Dow Average sharply reminded traders. Don’t bet against the global scientific community either. That’s why I am fully invested and within spitting distance of a new all-time high. After a pre-election low, the market will soar to new highs. Even if Trump loses the election, quantitative easing and fiscal stimulus will continue as far as the eye can see.
The elephant unwinds. Softbank dumped $718 million worth of technology call options deleveraging in a hurry. (NFLX), (FB), and (ADBE) were the targets according to market makers. They still own $1.66 billion worth of long positions in call options. Softbank’s position has grown so large that even my cleaning lady and gardener know about them.
The Tesla bubble popped, down a record 22% in one day after traders learned it would NOT be added to the S&P 500. Tesla approached my medium-term downside target of down 40%, or $300 a share. It seems too much of its earnings were coming from non-recurring EV subsidies from the Detroit carmakers. With a peak market cap for an eye-popping $450 billion, it’s probably the largest company ever turned down from the Index.
Google ditched Irish office space, putting on ice a plan to rent additional office space for up to 2,000 people in Dublin. The retreat from global office space continues. The company was close to taking 202,000 sq ft (18,766sq m) of space at the Sorting Office building before the virus hit.
AstraZeneca halted their vaccine trial after a patient fell ill. It’s not clear if the vaccine killed off the phase 3 trial volunteer, a preexisting condition felled them, or an unrelated illness hit. The company was developing the “Oxford” vaccine, which had been the best hope for developing Covid-19 immunity. It definitely creates a pause for the headline rush to develop a vaccine. Notice the tests are being held in South Africa where patients have little legal recourse. Keep buying (AZN) on dips.
“Skinny” failed, tanking the Dow Average by 450 points. A Republican Senate failed to provide even $500 billion to support a COVID-19-ravaged economy. There will be no more stimulus until a new administration takes office. Until then, unemployment will remain in the high single digits, tens of thousands of small businesses will fail, and home foreclosures will explode. The stock market cares about none of this, as it is dominated by large, heavily subsidized companies.
Nikola crashed, down 33%, in response to a damning report from a noted short-seller. They don’t have a truck, they lack a claimed hydrogen fuel source, and the founder is milking the company for every penny he can. It’s all hype, thanks to endless quantitative easing. None of the Tesla wannabees are going anywhere. General Motors (GM), which just bought 11% of the company, has egg on its face. With a market cap of $20 billion, Nikola is this year’s Enron. Sell short (NKLA) on rallies.
US inflation jumped, with the Consumer Price Index up 1.3% YOY in August, compared to only 1% in July. Soaring used car prices accounted for the bulk of the gain. More proof that the economy lives. Is this the beginning of the end or the end of the beginning?
Goldman Sachs moved global stocks to “overweight”. They’re preparing for the post-pandemic world. Cyclical “recovery” stocks like banks will take the lead. It fits in nicely with my view of a monster post-election rally and a Dow 120,000 by 2030.
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 clocked its second blockbuster week in a row, thanks to aggressively loading up on stocks at the previous week’s bottom (JPM), (C), (AMZN). My long in gold (GLD) looked shinier than ever. I bet the ranch again on a massive short in the US Treasury bond market (TLT) which paid off big time. My short position in the (SPY) is looking sweet.
My only hickey was an ill-fated long in Apple (AAPL), which I stopped out of at close to cost. Notice that I am shifting my longs away from tech and toward domestic recovery plays.
You only need 50 years of practice to know when to bet the ranch.
That takes our 2020 year-to-date back up to a blistering 35.51%, versus -2.93% for the Dow Average. September stands at a robust 8.96%. That takes my 11-year average annualized performance back to 36.41%. My 11-year total return has reached to another new all-time high at 391.42%. My trailing one year return popped back up to 58.13%.
It will be a dull week on the data front, with only the Federal Reserve Open Market Committee Meeting drawing any attention.
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, September 14 at 11:00 AM US Inflation Expectations are released.
On Tuesday, September 15 at 8:30 AM EST, the New York Empire State Manufacturing Index for September is published. A two-day meeting at the Federal Reserve begins.
On Wednesday, September 16, at 8:30 AM EST, September Retails Sales are printed. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out. At 2:00 the Fed announces its interest rate decision, which will probably bring no change.
On Thursday, September 17 at 8:30 AM EST, the Weekly Jobless Claims are announced. Housing Starts for August are also out.
On Friday, September 18, at 8:30 AM EST, the University of Michigan Consumer Sentiment is announced. At 2:00 PM The Bakers Hughes Rig Count is released.
As for me, the Boy Scout camporee I was expected to judge and supervise this weekend was cancelled, not because of Covid-19, but smoke. This will certainly go down in history as the year from hell.
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
Today, I would like to make a suggestion on another stock we traded in the past.
That stock is Bristol Myers Squibb Co. (BMY).
BMY is sitting right at the midband on the daily chart and is making a push higher.
BMY is trading around $59.20 as I write this and it does have weekly options.
I am going to suggest you trade the October 9th series. This should give us some time to see if BMY follows through as I expect.
My suggestion is going to be a debit spread and here is the trade:
Buy to Open October 9th - $59 Call for $1.45
Sell to Open July 24th - $63 Call for $0.30
The net debit will be $1.15 per spread. The maximum gain on the trade will be $2.85 per spread or 247% return.
Based on the tracking portfolio, limit the buy in to 8 spreads or .9% of the tracking portfolio.
Mad Hedge Technology Letter
September 11, 2020
Fiat Lux
Featured Trade:
(AVOID THE TESLA FRAUD LIKE THE PLAGUE)
(TSLA), (NKLA)
There is no car.
That is the conclusion from Hindenburg Research after an extensive investigation behind the origination and current business model of Nikola Corporation (NKLA).
This alleged “intricate” fraud has culminated financially with GM acquiring $2 billion in stock (an 11% stake) in Nikola for non-cash contributions such as engineering and validating a truck for Nikola, $700 million in expense reimbursements, supply contracts, and 80% of the EV credits.
What are the critical problems with Nikola?
There is a laundry list of them.
Inexpensive hydrogen is fundamental to the success of Nikola’s business model. CEO of Nikola Trevor Milton misled hundreds of people and in multiple interviews to have succeeded at cutting the cost of hydrogen by 81% compared to peers.
He also claimed that the company is producing hydrogen.
Nikola has not produced hydrogen at this price or at any price, as he later admitted when pressed.
Trevor claims Nikola designs all key components in-house, but it seems that they have merely bought them from third parties.
Nikola actually buys inverters from a company called Cascadia. In a video showing off its “in-house” inverters, Nikola concealed the Cascadia label with a piece of masking tape.
Their order book has been gerrymandered by touting multi-billion dollars that aren’t real. U.S. Xpress reportedly accounts for a third of its reservations, representing $3.5 billion in orders, but U.S. Xpress had only $1.3 million in cash on hand last quarter.
The actual development of the car has never come to fruition or even started, but seems like an elaborate hoax just to get investors' money by producing fake commercials.
In 2016, Milton hyped “The Holy Grail” of hydrogen technology for trucking, but there has been zero evidence of this.
Milton stenciled in “H2” on the truck despite the vehicle displaying zero hydrogen capabilities
Constructing a zero-emission hydrogen truck is rather difficult. However, merely stenciling “H2” and “Zero Emission Hydrogen Electric” on the side of a non-functioning truck is much easier.
Even the design has been outsourced to a company called Stellar Strategy LLC. Stellar is a well-known producer of off-road vehicles who had advised Nikola on the open cabin version.
The biggest fraud, which can’t be glossed over, is the claim about its battery technology.
Nikola claimed to have cutting edge battery technology, but that was merely a lie.
They planned to buy Battery Tech but found out after it was a vaporware company created by a man who had been indicted months earlier after using his NASA expense account to hire prostitutes.
In 2019, after a signed partnership with Bosch and Powercell, Powercell terminated its partnership saying the business terms were “totally unacceptable”.
After this marginal behavior, Nikola went public then giving it access to billions of public funding even though it had never designed, built, or delivered any resemblance of a car since 2014.
Then the CEO said it produces hydrogen for under $3/kg, representing a 81% discount to the rest of the world, but later admitted it was not true.
What about its staff?
Nikola’s director of hydrogen production/infrastructure is Milton’s little brother, who paved driveways in Hawaii before his Nikola job.
Nikola’s head of infrastructure development is the former general manager of a golf club In Idaho.
Lastly, Nikola’s Chief Engineer was a pinball machine repair guy before his Nikola job.
Nikola is clearly a front for Milton to transfer money into his personal life and has cashed out $70 million around the IPO and amended his share lock-up from 1-year to 180 days.
If he is fired, his equity awards immediately vest, and he is entitled to $20 million over two years.
Milton likely will never even start building a real car.
This is basically deception ranging from passing off fake products as real, staging of misleading videos, which require extensive premeditation, planning, and execution.
He has lied about the abilities of Nikola and the company simply has never even tried to build a car that the company is focused around.
The Tesla (TSLA) and Elon Musk narrative has made investors gullible to throw money at the next Tesla even if it is all a fake.
The money is literally funneled into Milton’s personal life allowing him to buy $50 million of Utah real estate.
The question now is what will GM do after they find out the truth about the matter?
GM might try to recoup the $2 billion (11% stake) if there is a possibility of reclaiming that capital, but if that is sunk money, they might choose to make the best out of a bad situation and elevate Nikola and make a real car out of it.
The only way to save this sinking chief is for GM to gut this fraudulent enterprise and put real engineers in Nikola with its real battery technology and leverage the brand of Nikola.
Nikola also has the support of the U.S. Central Bank that has propped up 40% of the S&P, are essentially zombie companies that cannot even service the interest on their debt.
Could this just be a $2 billion marketing cost for GM? It just might be.
In any case, there are many twists and turns coming up and GM might choose to write off $2 billion.
Unless GM decides to save Nikola, there is no new money coming in and that would be the time to short the stock.
The abomination that is the U.S. financial system encourages financial manipulation on an immense scale because the access to easy money has emboldened the conmen to come up with companies like this.
The insane reality is that CEO and Founder Trevor Milton was able to perpetuate this fraud for so long and cash out from investors who did not do any due diligence.
Nikola is now 7 years old and there are no signs of a car, only fake commercials of one.
The ball is squarely in GM’s court.
If GM cuts its losses, Nikola will never get another dime from any outside investor and is almost guaranteed that they will most likely not be able to produce a real car let alone a quality one with a golf club general manager, concrete repairman, and pinball repair guy at its helm.
I would be short GM – this strikes me as pitiful desperation. They have no chance of catching Tesla and over time, Nikola will fail unless rescued by outside technology, engineering, and management.
“This thing fully functions and works.” – Said Founder and CEO of Nikola Trevor Milton at a Nikola show presenting a truck that didn’t function.
