2020 Archive - Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The Titanium Market

It is not true that this is a Teflon market, rising almost every day for four months.

It is a titanium market.

The more worries placed in front of us, the faster it rises. And this is happening in the face of falling earnings. This can only end in tears. The only question is how many pennies we can pick up in front of the steam roller before we get run over.

Here’s another sobering prediction. Goldman Sachs’ David Kotick expects that a Democratic win in this year’s election will cause S&P earnings to drop from $169 in 2019 to $163 in 2021, the result of rising corporate tax rates.

Take the earnings multiple down from the present 20 to 15 times earnings where it was three years ago, and the stock index can plummet by 25%.

These are numbers to take seriously, especially given that the president is behind the front runners by 14 points in the national polls.

It all underlines the rising risk that the election poses to the market. Everyone I know to a man is pulling money out of the market, and inquiries about long volatility strategies (VIX) are rising daily.

The general agreement is that in 2020, we are going to have to work a lot harder for a lot less money. There isn’t going to be a repeat of the 28% gain we saw in 2019.

If there is, you want to sell all your stocks and your home, change your name, and move to Brazil, where there is no extradition treaty, because the following crash will be so enormous that no one will be spared.

The end of January 2018 comes to mind, which, after a meteoric move, markets plunged 17%.

Cash is a position, it is an opinion, has option value, and it is probably the best one of all to have right now. You can’t take advantage of any 17% dives if you go into them fully invested. I believe that once the New Year equity allocation is done, we could have a problem.

Risk exploded with the US assassination of an Iran general, with the country vowing revenge. Airline stocks globally went into free fall, and oil prices soared. Wildly overbought markets got their comeuppance, with the Mad Hedge Market Timing Index at an all-time high of 97. Wait three days for markets to price this in. I told you 2020 would be harder!

Gold approached a seven-year high on Iran attack, as over-leveraged traders scrambled for cover. So far, gold and oil are the trades of the decade, which is only seven days old. Keep buying (GLD) on dips, oil (USO) not so much. $1,927 an ounce, here we come!

Tesla deliveries hit new high in Q4, to a record 112,000. There was clearly a stampede before the $3,250 per vehicle clean air subsidy expired at yearend. Musk also cut prices 16% to $43,000 for the Shanghai-made Model 3, creating another stampede there. Keep buying (TSLA) on dips.

The Tesla market cap just peaked at $86 Billion, with the stock at an incredible $490 a share, making it the most valuable American car company in history. What is 25% of the global car market worth in a decade? Apparently quite a lot.

Netflix won big in the Golden Globes, capturing 17 nominations, with Amazon Prime close on their tail. It’s all about content streaming now. If they can only figure out how to take on Disney Plus and Apple Plus. Avoid (NFLX), buy (DIS) and (AMZN).

The S&P Case Shiller National Home Price Index rose 2.2% in October. Phoenix (5.8%), Tampa (4.9%), and Charlotte, NC (4.8%) showed biggest gains. Only San Francisco was down, the victim of lost SALT deductions. Housing still has another decade to run. Buy (LEN) on dips.

Boeing backs simulator training as a path back to flightworthiness for the 737 MAX. As a former flight instructor myself, this is what I have been advocating all along. Whenever things start to improve for Boeing, another crash happens as did with an antiquated 737 in Tehran last week, accidentally shot down by their own people. Keep buying dips in (BA).

The ADP Report showed a red-hot December, with 202,000 private sector job gains. If so, interest rate rises may come sooner than you think.

I never thought I’d say this, but the Mad Hedge Trade Alert Service has made no money so far this year. Of course, the year is only seven trading days old.

Buying the Mad Hedge Market Timing Index at 90 and selling it at 97 is not my kind of market. Nor should it be yours. The money being made now is very high-risk.

Better to sit on your laurels of a 55.86% profit last year and wait for a better entry point.

My Global Trading Dispatch performance held steady at +356.91% for the past ten years, an all-time high. My 2019 year-to-date came in at a final +55.86%. We closed out December with a market beating +4.97% profit. My ten-year average annualized profit ground back up to +35.28%.

The coming week will be a noneventful one on the data front, with only housing data gaining our attention..

On Monday, January 13 at 9:00 AM, Consumer Inflation Expectations for December are out.

On Tuesday, January 14 at 7:00 AM, the NFIB Business Optimism Index is released.

On Wednesday, January 15, at 6:15 AM, New York State Manufacturing is announced.

On Thursday, January 16 at 8:30 AM, Weekly Jobless Claims come out. December Retail Sales are published at 9:30.

On Friday, January 17 at 9:30 AM, December Housing Starts s are printed. At 10:30 Industrial Production is released.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I will be leading an Orienteering class in San Francisco this weekend, teaching 20 Boy Scouts how to use a compass and navigate over a ten-mile course. Hey, how bad can it be? I found California! Spoiler alert: after a ten-mile hike, we end up at the Ghirardelli Square Chocolate factory at Fisherman’s Wharf.

When I applied for the position, I listed as qualifications 50 years as an FAA commercial pilot and navigator, and a stint as a Marine Corps combat pilot.

They accepted me on the spot.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

January 13, 2020

Tech Letter

Mad Hedge Technology Letter
January 13, 2020
Fiat Lux

Featured Trade:

(THE DEATH OF THE GIG ECONOMY)
(GRUB), (OYO), (LYFT), (UBER), (RAPPI)

The Death of the Gig Economy

Tech Letter

The demise of the gig economy is upon us.

That is the latest takeaway from a slew of negative news overflowing the news wires lately.

As many of you know, I hate this niche of tech with a passion, and it has been discovered as nothing more than a marginal fly-by-night sub-sector passing off the cost of employees and their wages to the investor.

They also contribute no meaningful technology that moves the needle.

When the hammer fell on Adam Neumann’s WeWork, the hammer fell equally as hard on the gig economy business model that brought public markets the likes of Uber and Lyft.

The path to venture capitalist’s cashing in abruptly closed off was the end development to all this mayhem.

So I was not surprised when online food deliverer Grubhub (GRUB) had a dead cat bounce after rumors of them looking for a sale to their badly run company.

Then last Friday was the day the chickens came home to roost with Grubhub shares cratering over 8%.

If there is a sale, at what heavily discounted price will it go for?

We could see a marked down shell of its former self.

Grubhub naturally came out and rejected the notion that they are about to be sold off.

Where there is smoke – there is fire.

They did, however, admit they are in the process of “consulting” about certain acquisitions which could mean purchasing inorganic growth to juice up their numbers ahead of a sale.

There are four market leaders who control roughly 80% of the food delivery service business.

But the food war is far from over as competitors undercut each other time after time.

Competition in the food delivery market is driving down the unit economics of online food delivery to a nadir at a time when they can least afford it.

The other three involved are Uber Eats division of Uber (UBER) as well as Postmates and DoorDash.

Grubhub mentioned that there will likely be opportunities to acquire market share, but at what cost?

Acquiring inorganic revenue is at peak cost in 2020.

Cost per unit matters more now than any other time in the past 10 years boding ill for Grubhub and its competition.

And until they adequately address the unit economics in detail, readers must assume that Grubhub is on a suicide mission and you won’t know how close they are to the end until there is a dramatic announcement describing it.

The big takeaway here is that conditions are ripe for consolidation in the online delivery business.

As we go further out on the risk curve, private unicorns are in dire straits too.

Taking a barometer of this subsector allows investors to digest the level of risk premium in the overall markets that can be applied to safer parts of the tech ecosphere through extrapolation techniques.

Venture capitalist Masayoshi Son is infamous for overpaying a slew of tech growth firms and in 2020, so far, it has not been kind to him.

Oyo allows customers to book hotel rooms in more than 80 countries through its app.

It even converts struggling local hotels into Oyo franchises, puts up some money to remodel the interior, and takes commission on every booking.

The startup is dumping 5% of its staff in China and another 12% of employees in India, as part of a reorganization.

Oyo is the third company in SoftBank's portfolio to shed jobs in a week, following the layoffs at robotic pizza startup Zume and car rental company Getaround.

Oyo has sucked in more than $3 billion in capital and the last insane tranche of investment values the company at more than $10 billion.

SoftBank has been throwing money at the company since 2015.

The firm is otherwise known as the "SoftBank's jewel in India" for being one of the country's most valuable private companies.

However, there has been a recent barrage of sub-optimal reports suggesting they have accelerated sales by underhanded business practices.

A peek into the firm showed explicit evidence that Oyo rented thousands of rooms at unlicensed hotels and guesthouses then allowing police and other officials use the service for free to avoid trouble with the authorities.

The pain for Softbank doesn’t just stop at Oyo, Rappi has been dragged down as well.

The Latin American delivery startup is laying off 6% of its workforce, less than a year after Japan’s SoftBank Group pumped in nearly $1 billion in the company.

Softbank is putting pressure on local management to trim the fat off their models and forcing them to become profitable now.

Rappi has expanded to nine countries since its founding in 2015.

It plans to be the swiss army knife of online deliveries by getting into groceries, restaurant meals, medication, furniture, and has even foolishly branched out into scooter rental, travel, and basic banking services.

Softbank plans to pour another $4 billion into South American startups but one must beg to ask, are they throwing good money on top of bad money?

Certainly seems so.

When asked how soon Rappi would turn in a profit, co-founder Sebastian Mejia was adamant that his sole priority was to grow fast, and that investors were on board with the plan.

This is code name for NEVER!

Softbank and its vision fund are set for more death by a thousand cuts in 2020, and being in the wrong place at the wrong time aggravates the mess they find themselves in.

Short all companies reliant on gig economy workers in the public markets and prepare for a gloomy IPO pipeline that will last through the end of 2020.

January 13, 2020 - Quote of the Day

Tech Letter

“One way to understand human progress is to look at how technology has made products and services - once reserved for the elite - progressively more accessible and affordable.” – Said CEO of PayPal Dan Schulman

January 10, 2020

Diary, Newsletter, Summary

Global Market Comments
January 10, 2020
Fiat Lux

Featured Trade:

(FRIDAY, FEBRUARY 7 PERTH, AUSTRALIA STRATEGY LUNCHEON)
(JANUARY 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(VIX), (VXX), (TSLA), (SIL), (SLV),
(WPM), (RTN), (NOC), (LMT), (BA), (EEM)

January 8 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 8 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: If the market is doing so well, why is the Fed flooding the market with liquidity?

A: It’s election year, so their primary focus is to get the president reelected and do everything they can to make sure that happens. If we continue at the current rate, the Fed will have zero ability to get us out of the next recession which will make it much deeper than it would be otherwise. Doing this level of borrowing and keeping interest rates near zero with the stock market going up 30% a year is insane, and we will be severely punished for it in the future.

Q: With the Volatility Index (VIX) near a 12-month low and the Mad Hedge Market Timing Index near an all-time high, is this a good time to put on LEAPs for the (VXX)?

A: Yes, in fact, a (VXX) LEAP (Long Term Equity Participation Security, or one-year-plus option spread), is the only LEAP I would put on right now. I get asked about LEAPs every day because returns on them are so huge, but I am holding back on a trade alert on a (VXX) leap because it seems like in January they really want to run this market high and run volatility down low. On the next move to a (VIX) in the $11 handle, you want to put out a one-year LEAP with a $16 strike. And that is essentially a guarantee that you will make money sometime in the coming year on a big down move in the stock market. (VXX) LEAPs are coming, just not yet.

Q: Do you think Iran is done with their attacks against the US or will there be more?

A: The belief there will be no more attacks is to call the end of a 40-year trend. There will be more attacks, and those are going to be your long side entry points. Every geopolitical crisis for the last 10 years has been a great entry point on the long side and the next one will be no different. Just hope you are not one of the victims.

Q: What would a war with Iran mean for the US economy and should I buy defense stocks?

A: You can take the Iraq war, which cost us about $4 trillion, and multiply that by three times to $12 trillion because Iran’s economy is three times the size of Iraq and has a much more sophisticated military. The Iranians are really in a good position because they know the US has no appetite for another Iraq, Afghanistan, or Vietnam. They just want us out of their neighborhood. As far as defense stocks, those really move on very long-term investments and production for government contracts. When you get an attack like this, you get a one-day pop of 5% and then they usually give it all back. So, I wouldn't be chasing defense stocks like Lockheed Martin (LMT), Northrop Grumman (NOC), and Raytheon (RTN) at these high levels—it’s a very high-risk trade.

Q: Will Boeing (BA) take heat from the Ukrainian crash in Tehran?

A: Yes. It’s down about $5, and you might even consider running the numbers on a February call spread. This may be the last chance to get into Boeing at those low levels. The 737 MAX will fly this year, their most important product.

Q: What’s your opinion on Thai Baht?

A: This really is the home here for opinion on all asset classes, large and small. The Thai Baht will rise. It’s a weak dollar play. Money is pouring into all the emerging currencies because of the massive overborrowing that’s going on in the U.S. Countries that overborrow and print money like crazy always debase their currencies over the long term. That makes emerging markets (EEM) a great buy, which are trading at half the valuation levels of US ones.

Q: U.S. hog farmers missed the opportunity of a lifetime last year because of African Swine Flu. Any thoughts on the price of pork and commodities for 2020?

A: They should do better now that we’re at least getting relief from an escalation of the trade war. However, I gave up covering agriculture because the American farmer is just too efficient; every year they just produce more and more crops with fewer and fewer inputs—it’s a loser’s game. They occasionally get bad weather and get a big price spike, but that Is totally unpredictable. I'm staying away from ag stocks. In terms of buying soybeans or Apple, or Google, or Amazon, I’ll take the tech stocks any day over ag’s. Plus, the insiders have a big advantage in ag’s.

Q: What is the ticker symbol for the Silver ETFs?

A: The Silver metal ETF is (SLV), Silver miners is (SIL), and the Silver Royalty Trust, Wheaton Precious Metals, is (WPM).

Q: Why has volatility been so minimal even with massive geopolitical risk going up?

A: Liquidity trumps all. This month, the fed is pumping a record $160 billion into the financial system, and all that money is going into stocks, making them go up and making volatility go down. Until that changes, this trend will continue.

Q: Apple just passed $300, is the next stop $400?

A: Yes, and we could get that this year in the run up to 5G in September. By the way, my average cost on my Apple shares split adjusted is 50 cents. I bought it in the late 1990s when the company was weeks away from bankruptcy.

Q: Any thoughts on Tesla (TSLA)?

A: Yes, go out and buy the car, not the stock. Wait for some kind of pullback. We have just had a fantastic run of good news kicking the stock from $180 up to $490. I think we will make it up to $550 on this run. But you don’t want to get involved unless you’re a day trader because now the risk is very high. The next big move for Tesla is going to be the announcement of a production factory in Berlin, where they will try to take on Mercedes, BMW, VW, and Audi on their home turf. Then, they will own Europe.

Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

January 10, 2020 - MDT Pro Tips A.M.

MDT Alert

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

January 10, 2020

Tech Letter

Mad Hedge Technology Letter
January 10, 2020
Fiat Lux

Featured Trade:

(FINTECH IS GOING INTO OVERDRIVE)
(PYPL), (SQ), (MA), (V)

Fintech is Going Into Overdrive

Tech Letter

Last year was the year of Fintech and 2020 is the year when this industry goes into overdrive.

Let’s take a look at one of my top choices, PayPal (PYPL).

Millennials are the primary customer demographics to the main platform, but the attractiveness of peer-to-peer payment system Venmo is gaining momentum.

PayPal should be on a short list of fintech stocks for investors and there is certainly more room to run for the share price.

Last quarter’s numbers of 9.8 million net new actives mean that PayPal now has 295 million active accounts across all platforms.

Engagement continues to be a bright spot growing by 9% to almost 40 transactions per active account.

Mobile is a major contributor to success with 172 million consumers and 13.8 million merchants.

Venmo processed more than $27 billion in volume for the quarter, growing 64%.

They are doing $300 million in payments per day and an annual run rate that now exceeds $100 billion.

The Venmo team recently inked a deal with Synchrony to provide a Venmo credit card.

Credit products continue to be another gateway to more success with new consumer installment plans in the United States and Germany which allow PayPal customers to pay with streamlined monthly payments.

This capability is already leading to incremental sales and led to signing a long-term strategic partnership agreement with Citi Australia to develop consumer credit products for PayPal's customers in Australia.

Additional relationships were further expanded with Walmart launching PayPal Checkout as the sole payment instrument for its online grocery business in Mexico.

In Japan, PayPal is one of the official partners for the Japanese government's plan to promote cashless payments throughout the country.

PayPal now offers account linking through mobile devices with Capital One and PNC Bank in the United States.

If you thought their international strategy stopped there, there are other irons in the fire.

PayPal became the first non-Chinese payments company to be licensed to provide online payment services in China.

They announced in September that the People's Bank of China has approved a 70% equity interest in GoPay, a license provider of online payment services.

China is a tricky revenue proposition and it’s not guaranteed to flourish on the mainland, but this shows the pro-active way that PayPal seeks to expand its total addressable market and long-term growth prospects.

The license enables PayPal to expand upon relationships with existing partners like China Union Pay and AliExpress and forge fresh partnerships with China's financial institutions and technology platforms.

PayPal’s success has so far depended on innovation and acquisitions - I fully expect this trend to continue in 2020.

PayPal announced it was buying shopping and rewards platform Honey Science Corporation for $4 billion.

This year is the beginning of another compelling one-year bull case aided in part by higher expectations from those diverse set of partnerships, such as with MercadoLibre Inc. and Uber Technologies Inc., along with PayPal’s pricing, Honey online coupon transaction, and Venmo monetization.

I anticipate further sustained overperformance in margin expansion as well.

I expect an overall payments industry-wide volume growth of 11% in 2020 and PayPal will grow into its position in a still healthy broader economy.

Payment sector operating metrics, from credit card volume growth, to enterprise IT budget growth, to U.S. employment growth, are robust supporting the bull case for PayPal in 2020.

Aside from PayPal, my alternative favorites in the payments space that could see anywhere from 7%-20% share appreciation in 2020 are Square (SQ), Mastercard Inc. (MA), and Visa Inc. (V)

It is likely that 2020 will signal a new decade of super growth for the digital payments market.

And I expect PayPal to increase its solid footprint in web, in mobile app platforms, and in retail stores globally through organic growth, acquisitions, and partnerships.

PayPal’s profitable business model and pro-active management will help the share price reach new highs.

However, not only for fintech stocks, but the overall market is ripe for some profit-taking in the short-term because of the recent melt-up.