Mad Hedge Technology Alerts!
Hello $2,000 iPhone.
Flabbergasted consumers reacted last holiday season when Apple dared offer a $1,000 smartphone.
How confident this company has become!
Well, this is just the beginning.
Apple (AAPL) will be the first smartphone maker to offer a $2,000 phone, and I will tell you why!
The tech industry is going through a cumbersome wave of repricing after several high-profile debacles that have cast the light on the true value of data.
The upward revision of data has seen more players pour into the game attempting to carve out a slice of the pie for themselves.
The reason why tech companies will start offering their products at higher price points is because the inputs are rising at a rapid clip.
Apple's Development and Operations (DevOps) costs to design and maintain this outstanding product is going through the roof.
Apple's DevOps employees earn around $145,000 per year and compensation is rising. Granted, the technology is developing and batteries smaller, but salaries are rising at a quicker relative pace because of the dire shortage of DevOps talent in Silicon Valley.
It's possible that living in a shoebox at $4,200 per month in Mountain View, Calif., is off-putting for potential staff.
The most expensive part of an iPhone X is the OLED screen.
Apple estimated costs of $120 per screen manufacturing the Apple iPhone X. The cost doubled from LCD panels from $60 per screen.
Samsung (SSNLF) has been best of breed for screens for a while, and it is currently working on the next generation of Micro LED tech, which is the next gap up from the OLED displays of today.
Samsung has an inherent conflict of interest with Apple, creating tension between these tech stalwarts. Apple made the contentious decision to procure in-house screens at a secret manufacturing facility in Santa Clara, Calif., to avoid the constant friction.
It's common knowledge that the average price of technology shrinks over time, but the American smartphone industry has defied gravity with expected prices to shoot up 6% to $324 in 2018.
The Apple iPhone X raw costs were around $400 per phone. There is zero chance that a next gen, enhanced Apple smartphone will cost this low ever again.
Confirming this trend are Chinese smartphones retail prices rising at 15% last year.
The cost of memory, DRAM and NAND chips, rose dramatically this past year. As more memory is designed into these devices, the costs keep trending higher.
Lithium-ion batteries only add up to 1% to 2% of OEM (Original Equipment Manufacturers) cost and probably only bumps up the cost of iPhones incrementally.
The more skittish situation is the EV (Electric Vehicles) snafu.
Volkswagen (VLKAY) announced it will transform its entire fleet of 300 models into electrified versions by 2025.
In order to achieve this lofty objective, Volkswagen has earmarked $25 billion for batteries from Samsung, LG, and Contemporary Amperex. Volkswagen hopes to have 16 up and running (EV) factories by 2022, up from three today.
The goal is unattainable because of a lack of in-house battery production.
CEO Matthias Muller said the reason for not manufacturing in-house batteries was, "Others can do it better than we can."
Muller will rue the decision down the line as a myriad of companies migrate toward in-house solutions, giving firms more control over the process and overhead.
More importantly, Muller will have to rely on the ebb and flow of rising cobalt prices.
A battery for an (EV) ranges between $8,000- to 20,000, comprising the largest input for the (EV) makers such as Tesla (TSLA) and Ford (F).
Making matters worse, companies cut from all cloth are hoarding cobalt reserves based on anticipating the potential demand.
This phenomenon will cause all big tech players to replenish any reserves of base materials immediately.
Apple has had chip shortage problems in the past. This year is even worse than 2017, with NAND and DRAM chip supply trailing the demand by 30%. Tech companies have been hastily locking down contracts in advance to ensure the necessary materials to produce their flashy gadgets.
Lithium battery demand is expected to rise 45% between 2017 and 2020, and there has been no meaningful large-scale investment into this industry.
Battery production made up 51% of cobalt demand in 2016 and will hit around 62% by 2022.
Compounding the complexity is 60% of global cobalt production is found in one country - the Democratic Republic of the Congo (DRC).
DRC is a hotspot for geopolitical fallout and its history is littered with civil war, internal conflict, and poor infrastructure.
The 21st century will be dependent on a chosen group of valuable materials. Cobalt is shaping up to be the leader of this pack and is needed in a plethora of business applications such as EV, lithium-ion batteries, and PCs.
Cobalt is vital in metallurgical applications that include aerospace rotating parts, military and defense, thermal sprays, prosthetics, and much more.
The DRC recently proposed a revised mining law increasing taxes on cobalt and other precious metals. The legislation has yet to be written into stone and would certainly jack up the price of cobalt.
Glencore's (GLNCY) management has noted this mining tax is "challenging" at a time it is just completing its Katanga expansion.
Katanga has the potential to become the largest global copper and cobalt producer.
Copper is equally important to cobalt since cobalt production is a by-product of copper and nickel mining. Only 2% of cobalt results directly from cobalt mining, and 60% via copper mining, and 38% via nickel mining.
Last year, Freeport-McMoRan (FCX) was dangling its cobalt project to outside investors in the DRC but was unable to fetch a premium price.
In a blink of an eye, China Molybdenum Co. (CMCLF) swooped in and (FCX) accepted an offer of $2.65 billion. (FXC) used the sale to pay down debt while the price of cobalt has taken off to the moon.
It gets worse, China owns 80% of refined global cobalt production and 90% of its operations are in the DRC.
China is attempting to corner the cobalt market in the DRC, gaining a stranglehold on future technological devices, (EV)s, and big data.
The keys to future technological hegemony lie in the jungles of the DRC, and China has the first mover advantage and backing of the communist party as (CMCLF) strives to be a global leader in cobalt production.
China has smartly wriggled its way down to the bottom of the supply chain capturing cobalt resources, and if a trade war ensues, China can simply cut off cobalt supply lines to whomever.
There is nothing CFIUS or Donald Trump can do.
America's 14% of global cobalt production will be insufficient to produce the new (EV)s, iPhone 11s, gizmos and gadgets that American consumers demand for daily life.
Analysts expected Apple to acquire some supplementary companies that will aid in expansion following the overseas repatriation.
A thriving software outfit or a company of cloud developers would have sufficed. However, reports streaming in that Apple has entered into negotiations to buy a five-year supply of cobalt directly from miners for the first-time underscore where Apple's priorities lie.
Cobalt demand expects to increase by 30% from 2016 to 2020.
Apple is scared it will be locked out of the cobalt market or forced to pay ludicrous prices for its cobalt needs.
Considering the price of cobalt has quadrupled since June 2016, and smartphones are 25% of the cobalt market, it's a strategically prudent move by Apple's CEO Tim Cook in light of BMW (BMWYY) announcing the need of 10X more cobalt by 2025.
Going forward anything comprised of cobalt-based technology will garner a higher premium resulting in higher prices for consumers including that $2,000 iPhone.
(FCX) is a must buy for those who believe precious metals are the foundation to all future technology. Other intriguing names include Brazilian company Vale S.A. (VALE), and Glencore, the largest Swiss company by revenue.
Or if you have the cash, plunk it down on a cobalt mine in the DRC. But only if you're insane.
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Quote of the Day
"Heavier-than-air flying machines are impossible." - Lord Kelvin, President of the Royal Society, in 1895
Mad Hedge Technology Letter
March 27, 2018
Fiat Lux
Featured Trade:
(SUDDENLY, INTERACTIVE BROKERS IS A LOT MORE VALUABLE)
(IBKR), (SCHW), (AMTD)
Longtime followers of the Mad Hedge Technology Letter know that I rely on Interactive Brokers (IBKR) for my pricing and execution.
It is fast, accurate, user friendly, and cheap.
Recently, more traders have been discovering these benefits. A lot more.
The halcyon days of January 2018 brought investors euphoria and hockey stick shaped charts.
Bitcoin even tickled the $20,000 mark.
Every risk asset minus interest rate sensitive stock relentlessly exploded skyward.
Then a funny thing happened.
The short volatility industry vanished in the space of one night and unleashed a new epoch of wild market gyrations.
One clear victor rises from the embers of the pandemonium and that is online broker Interactive Brokers Group, founded by Hungarian entrepreneur, Thomas Peterffy.
The all-important gauge of Daily Average Revenue Trades (DARTs), the income stream from generated commission, will hoist the stock to new plateaus.
Total (DART)s rose 14% YOY with historic low volatility in 2017, down 27% from 2016 and (IBKR)'s stock still muscled out performance from $37 to $64, almost doubling.
The recent inflow of February reports indicates fixed-income revenue and currency trading set record highs.
TradeWeb, one of the largest bond trading platforms in the world, reported a 73% February YOY boost of European corporate and financial bonds. Bonds usually are traded via phone, and new trends show the push into electronic trading is advancing unabated.
A return to "normal" levels of volatility will propel online brokers to new heights. Low volatility diminishes trade volume while increased volatility spurs on trading volume.
As more trading traverses to digital platforms, the digitization of buying and selling stocks and the advent of crypto trading will entice risk-adverse Millennials to pile into risk assets.
Numbers show that Millennials have an affinity for options trading, suggesting the dynamic short termism of options provides the experiential thrill they seek in life.
Interactive Brokers was voted best of breed of online brokers in 2018 by the prominent financial publication Barron's. This annual edition gives the skinny on online trading platforms and a rough guide to which service best suits each investor.
I single out (IBKR) as a stellar company because the e-broker industry is experiencing a mammoth period of consolidation amid a price war.
E-brokers such as Fidelity slashed its commission rates from $7.95/trade to $4.95/trade in February 2017. As trading becomes commoditized, it's a race to the bottom and whoever is a volume leader with the best platform technology will be the last one standing.
This trend all favors (IBKR) which is positioned for scale like the FANGs. If customers do not possess the scale, the ultra-cheap commissions are unavailable.
The backdoor strategy here is the access e-brokers have to customer data flows. The treasure trove of trade flow data will become even more valuable with the upward re-pricing of data following the Cambridge Analytica mess.
Online brokers profit off customers' data by selling the information to High Frequency Traders (HFT) that input the data into evolving proprietary algorithms, which legally front run retail and institutional money.
(IBKR) fits (HFT) like a glove and the synergies are robust. The most lucrative accounts derive from the new batches of prop desks and hedge funds that trade heavily, desiring the best online platform technology for minimal slippage and smooth execution. (HFT)s trade in milliseconds and comprise 60% to 70% of daily trading volume, signifying immense bullishness for (IBKR).
The strategy so far is a winner, increasing customer accounts by 25% YOY, up to 483,000 in Q4 2017. Profit margins benefited as well, rising 15% to 71% YOY.
The second part of (IBKR)'s handiwork is net interest. Margin accounts due to fractional banking allow brokers to lend to clients. Any serious trader is using leverage to amass profits. At the height of financial malpractice in 2007, too-big-to-fail banks boasted leverage of 50x.
Total customer equity elevated by 46% YOY to $124.80 billion. IBKR also profits from the cash sitting in its own accounts, which accumulate higher relative returns from higher interest rates.
(IBKR)'s margin rates are lowest in the industry and still incredibly lucrative.
Every time the Fed raises the Fed funds rate, (IBKR) can ring in the cash register. The Fed is on an aggressive quantitative tightening agenda and a good omen for the upcoming earnings' report.
The trends ongoing in this industry overwhelmingly favor (IBKR). The shift to mobile will become more pervasive. Only a few years ago, mobile platforms were arcane and unintegrated with desktop platforms, forcing traders to disregard the mobile method.
Times have changed and (IBKR) cannot find enough developers to head its operations. The shortage of talented developers is causing a backlog of new projects, but this highlights the growing emphasis on its trading platform technology.
Offerings don't stop at trading execution. (IBKR) has built out a robo-advising service called IB Asset Management and via iBot, an A.I. assistant, traders can use prop-desk level algorithms to nimbly dip in and out of positions. The analytical features to dissect price data is breathtaking these days and will satisfy chart lovers.
The runway is long as the eye can see because many of these offerings can be transformed into reoccurring subscription services. Furthermore, brokers make money if the market ascends or declines as long as traders do something to stockpile data.
Other competitors to consider are Charles Schwab (SCHW), which recently acquired optionsXpress and TD Ameritrade (AMTD), which purchased Scottrade for $4 billion. (AMTD) cut 1,100 employees in the St. Louis, MO, branch lately and, in return, will replace them with a handful of techies to work on platform enhancement.
The broad-based consolidation reflects the grab for market share since many of the players have come to terms with the market's obsession for scale. Implementing scale directly means snagging more client accounts as the marginal cost per client barely budges with the tech infrastructure already established for all the big players.
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Quote of the Day
"I think there is a world market for maybe five computers." - IBM Chairman Thomas J. Watson, 1943
