Global Market Comments
May 4, 2021
Fiat Lux
Featured Trade:
(WHATEVER HAPPENED TO THE GREAT DEPRESSION DEBT?)
Mad Hedge Technology Letter
May 3, 2021
Fiat Lux
Featured Trade:
(BUY FACEBOOK ON THE DIP?)
(FB), (APPL)
A company such as Facebook (FB) simply must be on investors’ radar all the time because of the profitability element to it.
In a truncated period where growth stocks are out of favor, these bottom-line tech behemoths can weather the storm.
This tech firm doesn’t produce any real products because the user is the product.
A favorable expense layout is why net income this past quarter was $9.5 billion on $26.17 billion revenue.
Even a grossly profitable company such as Apple (AAPL) does a lot worse per dollar generated.
For every $3.79 billion in revenue at Apple, they only profit $1 billion, which is great compared to the status quo except Facebook.
Yes, it costs money to source raw materials and supplies to construct iPhones, iPads, and iMacs, which makes Apple’s operation much more impressive than Facebook.
Strip the hassle of making stuff like iPhones and iMacs and you have Facebook, an online portal to post stuff and serves no real purpose but to display ads to people.
Their attempts to get into the device and ecosystem games have utterly fizzled because users simply have no trust in Facebook management and how they fumble around personal data.
Why buy a Facebook Portal, the firms’ microphone video tablet, when there are trustful options out there without sacrificing the quality?
Before releasing the Portal, during the product announcement, Facebook initially claimed that data obtained from Portal devices would not be used for targeted advertising.
One week after the announcement, Facebook changed its position and stated that “usage data such as length of calls, frequency of calls” and “general usage data, such as aggregate usage of data will also feed into the information that we use to serve ads”.
So Facebook is quite stuck with what they have now, which is a blossoming Instagram and legacy Facebook portal both of which are cash cows.
They aren’t able to do M&A because of fear of anticompetitive legislation and their debauchery of privacy has locked them out of the hardware market.
Facebook wants to monetize WhatsApp, Facebook’s wildly popular chat app, but is finding resistance in funneling user data with an updated user agreement being criticized heavily worldwide with users deleting the app and downloading an alternative mainly the app Telegram.
Facebook rescinded the user agreement and has delayed their WhatsApp targeting ad division until they can ram the updated agreement down WhatsApp users’ throats.
I will say that “what they have” has been working out extremely well for the company when Facebook reported daily active users reaching 1.88 billion, up 8% or 144 million compared to last year.
Q1 total revenue was $26.2 billion, up 48% and this is attributed to growth in advertising revenue largely driven by continued strength in product verticals such as online commerce.
If investors don’t remember, Facebook was dragged down to the 20% revenue growth level just a few quarters ago on all the privacy hullabaloo.
To reaccelerate revenues is a major win for Facebook that can’t be understated.
Growth was broad-based across all advertiser sizes, with particular strength from small- and medium-sized advertisers.
Facebook’s year-over-year ad revenue growth also benefited from lapping pandemic-related demand headwinds experienced during March of last year. On a user geography basis, ad revenue growth accelerated in all regions.
Facebook’s bread and butter are the strength of their advertising revenue growth in the first quarter of 2021, which was driven by a 30% year-over-year increase in the average price per ad and a 12% increase in the number of ads delivered.
What is Facebook doing to branch out revenue channels?
They haven’t quit the hardware game with their Virtual Reality (VR) headset product called Oculus Quest 2 and management only played it down by saying they saw “sustained strength” without busting out any specific metrics.
I read the tea leaves as this isn’t doing enough for management to offer real data on it.
When I analyze the Oculus Quest 2 VR headset, the $299 retail price, it practically means they are losing money on it by a wide margin.
There is no premium in the pricing because the price is one of the few ways that consumers can overlook data privacy issues.
The $299 gets you a robust virtual reality headset with 6GB of RAM, a Qualcomm Snapdragon XR2 CPU, 64GB of storage, 1832x1920 per eye display, and a pair of controllers.
The jury is out whether the stickiness of VR will actually continue and if it does, how long full-scale adoption will take.
But it is painfully clear that Facebook will be losing money even on Oculus Quest products until there’s a 5th or 6th or even 7th iteration or even further.
There is nothing to suggest that VR is on the verge of full-scale adoption.
CEO and Founder Mark Zuckerberg must be tearing his hair out about how he has effectively been locked out of hardware products since the inception of his empire.
And no, data centers, their largest expense along with remunerations, to hold the data you give him don’t count as hardware.
A few headwinds to take note of, in the third and fourth quarters of 2021, Facebook expects year-over-year total revenue growth rates to significantly decelerate sequentially as they are facing tough comparable data from the prior year.
Lastly, Facebook will continue to expect increased ad targeting headwinds in 2021 from regulatory and platform changes, notably the recently launched Apple iOS 14.5 update, which will have an impact in the second quarter.
As the global economy and US economy open back up in a roaring fashion, it’s hard not to like this stock.
Ad budgets are on the verge of exploding and Facebook is still one of a nicely forged duopoly.
Even if they haven’t been able to branch out, they are incredibly proficient at what they do, and serving ads to a 2 billion plus user base will become more voluminous and expensive as the year advances.
No surprise the stock is at $325, another all-time high, and even if I personally hate the company, the stock is a viable candidate to buy on any dip.
As we move into the next part of the year, I do believe the buyback story will accelerate for big tech and cash cows like Facebook, and its stock will hit $400 by the year-end.
At the end of the day, this a story of the big getting bigger.
OCULUS QUEST 2 – THE NEXT DISASTROUS FACEBOOK HARDWARE?
“Technological progress has merely provided us with more efficient means for going backwards.” – Said English writer and philosopher Aldous Leonard Huxley
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
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
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
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
Global Market Comments
May 3, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE STAIR STEP MARKET IS HERE),
(SPY), (TLT), (MRK), (EL), (UNP), (PFE), (GM), (PYPL), (REGN), (ROKU)
The last six months have been the most successful in my 52 years of trading. The only thing that comes close were the last six months of 1989 when the Tokyo market went straight up and hit a 30-year peak.
Everything I tried worked. The trades I only thought about worked. And the 50 trade alerts I abandoned on the floor because the market moved too fast worked as well. That’s how I missed Facebook (FB) and Amazon (AMZN).
It is believed that if you set a team of monkeys loose, randomly hitting keys on typewriters, they would eventually produce Romeo and Juliet. In this market, they have been producing the entire works of Shakespeare on a daily basis.
It has been that good.
President Biden has been looking pretty good too, having presided over the best starting three-month stock market results since 1933. That is no accident. The massive stimulus and the remaking of the country he has proposed have Franklin Roosevelt’s New Deal-inspired handwriting all over them.
Yet, traders have been puzzled, perplexed, and befuddled by companies that announce the best earnings in history only to see their shares sell-off dramatically. However, the market has shown its hand.
We’ve now seen three quarters of tremendously improving earnings and stock dives. It’s a 12-week cycle that keeps repeating. Shares rally hard for six weeks into earnings, peak, and then go nowhere for six weeks. Wash, rinse, repeat, then go to new all-time highs.
But stocks don’t fall enough to justify getting out and back in again, especially on an after-tax basis. Therefore, it’s just best to lie back and think of England while your stocks do nothing.
If my analysis is correct, then it's best to imagine the rolling green hills of Kent and Wiltshire, the friendly neighborhood pub, and Westminster Cathedral until June. If you want to get aggressive, you might even sell short an out-of-the-money call option or two to protect your portfolio.
The Fed leaves rates unchanged, indicating that the economy is improving, but that interest rates are going nowhere. No surprise here. Jay Powell is still going for maximum dove. Strong Biden policy support and the rollout of the vaccine are major positives. $120 billion in bond buying continues. The Fed will keep interest rates at zero until the US economy reaches maximum employment by adding 8.4 million jobs. That could be a long wait as I suspect those jobs have already been destroyed by technology. Stocks popped on the news. The Bull lives!
Q1 GDP eExploded by 6.4%, and upward revisions are to come. That explains the 25% gain in the stock market during the first three months of the Biden administration, the best in 75 years. Coming quarters will show even stronger growth as the economy shakes off the pandemic and massive government spending kicks in. We will recover 2019 GDP peaks in the next quarter. Virtually, all economic data points will set records for the rest of 2021. Buy everything on dips.
Weekly Jobless Claims dive again to 553,000, a new post-pandemic low. One of a never-ending series of perfect data. It augurs well for next week’s April Nonfarm Payroll Report.
New Home Sales up a ballistic 20.7% YOY in March on the basis of a signed contract. This is in the face of rising home mortgage interest rates. The flight to the suburbs continues. Homebuilder stocks took off like a scalded chimp. Buy (LEN), (KBH), and (PHM) on dips.
Pending Home Sales fell 1.9%, far below expectations, but are still up 23% YOY. Higher prices and record low supply are the problems. The Midwest leads.
Amazon sales soar by 44% in Q1, producing some of the best earnings in American corporate history. Jeff is expecting sales to reach a staggering $110-$116 billion in Q2. That’s why he hired 500,000 last year, the most of any company since WWII. Prime subscribers have grown to 200 million, including me. Ad revenues jumped an eye-popping 77%. The shares of the huge pandemic winner leaped $140 on the news. It’s all another step toward my $5,000 target.
Tesla revenues explode for 74%, and earnings soar to an eye-popping $438 million. Sales are to double or more in 2021 and are up 104% YOY. Q1 is usually the slowest quarter of the year for the auto industry. Global demand is increasing far beyond production levels. It is ducking around chip shortages by designing in a new generation that is currently available. Production of high-end X and S Models has ceased to allow more focus on the profitable Y and 3 Models. Those will resume in Q3. The shares were unchanged on the news. Keep buying (TSLA) on dips. It’s headed for $10,000.
Copper hits new 10-year high, lighting a fire under Freeport McMoRan (FCX) which we are long. We still are in the early innings of a major commodity supercycle. The green revolution goes nowhere without increasing copper supplies tenfold. A copper shock is imminent.
US Capital Spending leaps ahead, up 0.9% in March and up 10.4% YOY. The stimulus spending is working. All is well in manufacturing land, which is 12% of the US economy.
Case-Shiller explodes to the upside, the National Home Prices Index soaring 12% in February. That’s the best report in 15 years. Phoenix (+17.4), San Diego (+17.0%), and Seattle (15.4%) continue to be the big winners. This was in the face of a 50-basis point jump in home mortgage interest rates during the month. The rush to buy homes is pulling forward future demand. The perfect storm continues.
The Fed could start tapering its $120 billion a month in bond purchases as early as October, believes the Blackrock’s (BLK) Rick Rieder. When it does, expect the sushi to hit the bond market. Keep piling on those bond shorts, as I have been doing monthly, and am currently running a triple short position. Keep selling short the (TLT) on every opportunity.
When we come out the other side of pandemic, 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% to 120,000 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. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 13.54% gain during April on the heels of a spectacular 20.60% profit in March.
I used the post-earnings dip in Microsoft (MSFT) to add a new position there. I also picked up some Delta Airlines (DAL) taking advantage of a pullback there.
That leaves me 100% invested, as I have been for the last six months.
My 2021 year-to-date performance soared to 57.63%. The Dow Average is up 11.8% so far in 2021.
That brings my 11-year total return to 480.18%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.05%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 133.91%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 31.9 million and deaths topping 570,000, which you can find here.
The coming week will be big on the data front, with a couple of historic numbers expected.
On Monday, May 3, at 10:00 AM, the US ISM Manufacturing Index is published. Merck (MRK) and Estee Lauder (EL) report.
On Tuesday, May 4, at 8:00 AM, total US Vehicle Sales for April are out. Union Pacific (UNP) and Pfizer (PFE) report.
On Wednesday, May 5 at 2:00 PM, the ADP Private Employment Report is released. General Motors (GM) and PayPal (PYPL) report.
On Thursday, May 6 at 8:30 AM, the Weekly Jobless Claims are printed. Regeneron (REGN) and Roku (ROKU) report.
On Friday, May 7 at 8:30 AM, we learn the all-important April Nonfarm Payroll Report. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I received calls from six readers last week saying I remind them of Earnest Hemingway. This, no doubt, was the result of Ken Burns’ excellent documentary about the Nobel prize-winning writer on PBS last week.
It is no accident.
My grandfather drove for the Italian Red Cross on the Alpine front during WWI, where Hemingway got his start, so we had a connection right there.
Since I read Hemingway’s books in my mid-teens, I decided I wanted to be him and became a war correspondent. In those days, you traveled by ship a lot, leaving ample time to finish off his complete works.
I visited his homes in Key West and Ketchum Idaho. His Cuban residence is high on my list, now that Castro is gone.
I used to stay in the Hemingway Suite at the Ritz Hotel on Place Vendome in Paris where he lived during WWII. I had drinks at the Hemingway Bar downstairs where war correspondent Earnest shot a German colonel in the face at point-blank range. I still have the ashtrays.
Harry’s Bar in Venice, a Hemingway favorite, was a regular stopping-off point for me. I have those ashtrays too.
I even dated his granddaughter from his first wife, Hadley, the movie star Mariel Hemingway, before she got married, and when she was still being pursued by Robert de Niro and Woody Allen. Some genes skip generations and she was a dead ringer for her grandfather. She was the only Playboy centerfold I ever went out with. We still keep in touch.
So, I’ll spend the weekend watching Farewell to Arms….again, after I finish my writing.
Oh, and if you visit the Ritz Hotel today, you’ll find the ashtrays are glued to the tables.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Life is a Bed of Roses Right Now
