Mad Hedge Technology Letter
June 3, 2019
Fiat Lux
Featured Trade:
(WHY THE UBER IPO FAILED)
(UBER), (LYFT)
Do you want to invest in a company that loses $1 billion per quarter?
If you do, then Uber, the digital ride-sharing company, is the perfect match for you.
Uber couldn’t have chosen a worse time to go public, smack dab in the middle of a trade war almost as if an algorithm squeezed them into tariff headlines that are currently rocking the equity markets.
The tepid price action to Uber’s first period of being a public company has been nothing short of disastrous with the company tripping right out of the gate at $42.
The company that Travis Kalanick built would have been better served if they decided to go public in the middle of their growth sweet spot a few years ago.
Hindsight is 20/20.
Uber took in $2.58B last year during the same quarter and they followed that up with 20% growth to $3.1B, hardly suggesting they are delivering on hyper-growth an investor desire.
It will probably become the case of Uber hoping to manage growth deceleration as best as it can.
Infamously, the company has been busy putting out fires because of past poor leadership that threatened to blow up their business model.
The fall out was broad-based and current CEO of Uber Dara Khosrowshahi was brought in to subdue the chaos.
That worked out great in 2017 and damage control nullified further erosion in the company, but since then, management has not carved out an attractive narrative.
Just as bad, investors have no hope on the horizon that Uber can mutate into a profitable company.
It seems that costs could spiral out of control and even though the company is growing, the company is not a growth company anymore.
Investors must look themselves in the mirror and really question why they should invest in this company now.
In the short-term, positive catalysts are scarce.
The reaction to their first earnings report was slightly positive as management indicated that competition is easing up, spinning a negative issue into a positive light.
Remember that Uber bled market share after their management issues that I mentioned and Lyft (LYFT) has caught up significantly.
Lyft has also grappled with poor price action to their stock after they went public.
The result from both companies going private to public around the same time means that they will not be able to undercut each other on price because public investors will not give the same type of leash that private investors did.
This will cause losses to cauterize because subsidizing drivers will decelerate, and the pool of drivers will shrink.
In addition, passenger fares could rise because Uber will have no choice but to consider profitability when pricing rides meaning higher costs to the user.
What I am saying rings true for many tech companies and raising prices to satisfy shareholders is not a groundbreaking phenomenon.
As I see it, offering rides on the cheap could be coming to a screeching halt and nurturing margins could be the new order of the day.
The subsidizing effect can be found in the higher than normal gross bookings for the quarter of $14.65 billion, up 34% from the same period in 2018.
Cheaper fares will drive demand, and if Uber stopped helping out with the cost of rides, the 34% would fall to single digits in a heartbeat.
Even more worrying is the negative core platform contribution margin falling 4.5%, meaning the amount of profit it makes from its core platform business divided by adjusted net revenue is on the down.
Uber was able to post a positive 17.9% growth rate during the same period last year.
When the core business is reacting negatively, it’s time to go back to the drawing board.
I believe that the underlying problem with Uber is that they aren’t making any big moves to their business model that would put them in the position to foster hyper-growth.
Incremental changes like removing drivers who fail to collect a 4.6 or above rating and creating a subscription model for its higher growth Uber Eats division are just a drop in the bucket of what they could be doing with its brand and clout.
If investors were waiting for a big step forward with shiny announcements during the first earnings call as a public company, then they were left thirsting for more.
Uber gave us a mini baby step when they need leaps in 2019.
The bigger success might be that Uber had no monumental blow ups which is a telling sign that Uber has at least stabilized operations.
The downside with its food delivery business is that private businesses such as Postmates and DoorDash are private and can still tolerate even bigger losses which will put pressure on Uber Eats to endure the same type of losses.
As it stands, net revenue for its Uber Eats segment rose 31% to $239 million, but then investors must understand this business is scarily exposed and could be attacked by the venture capitalists boding ill for the stock.
Then considering that Uber’s fastest growing geographical segment is Latin America, last quarter was nothing short of abysmal with revenue cratering by 13% to $450 million.
Regulatory risks will cause American companies to take big write-downs the further away they operate from America, and Indian regulation is rearing its ugly head with e-commerce companies bearing the brunt of it.
Looking down the road, Uber has a faulty business model because of a lack of autonomous driving technology, and they will need to partner with a Waymo or Tesla which will destroy margins even more.
Uber has no chance of profitability in the near term, and the data suggests they have lost their growth charm.
Do not buy Uber here, it will become cheaper, and at some point, around $30, this name will be a good trade.
Management needs to up the ante in order to show investors why they are better than Lyft.
“Based on my experience, I would say that rather than taking lessons in how to become an entrepreneur, you should jump into the pool and start swimming.” – Said Co-Founder and Former CEO of Uber Travis Kalanick
Global Market Comments
June 3, 2019
Fiat Lux
Featured Trade:
(MONDAY, JUNE 24 MELBOURNE, AUSTRALIA STRATEGY LUNCHEON)
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR WHAT A WASTE OF TIME!),
(SPY), ($INDU), (JPM), (MSFT), (AMZN), (TSLA)
Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Update which I will be conducting in Melbourne, Australia on Monday, June 24, 2019 at 1:15 PM.
An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I’ll be giving you my up to date view on stocks, bonds, currencies commodities, precious metals, energy, and real estate.
I also hope to provide some insight into America’s opaque and confusing political system. And to keep you in suspense, I’ll be throwing a few surprises out there too.
Tickets are available for $232.
I’ll be arriving at 1:00 and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at a downtown five-star hotel, the details of which will be emailed with your purchase confirmation.
I look forward to meeting you and thank you for supporting my research.
To purchase tickets for this luncheon, please click here.
“Sell in May and go away” has long suffered from the slings and arrows of non-believers, naysayers, and debunkers.
Not this time.
Looking at the trading since April 30, we have barely seen an up day. Since then, the Dow Average has plunged 1,900 points from a 26,700 high, a loss of 7.1%. We are now sitting right at my initial downside target of the 200-day moving average.
The Dow has now given up virtually all its 2019 gains, picking up only 2.0%. In fact, the market is dead unchanged since the end of 2017. If you have been an index investor for the past 17 months, your return has been about zero. In other words, it has been a complete waste of time.
There are a lot of things I would have preferred to do rather than invest in index funds for the past year and a half. I could have hiked the Pacific Crest Trail….twice. I might have taken six Cunard round-the-world cruises and met several rich widows along the way. I might even have become fluent in Italian and Latin. Such is the value of 20-20 hindsight.
You would have done much better investing in the bond market, which has exploded to a new two-year high, taking the ten-year US Treasury yield down to a once unimaginable 2.16%. During the same period, the (TLT) has gained 11 points, or 9.0% plus another 3.0% worth of interest. You did even better if you invested in lower grade credits.
Which leads us to the big question: Will stocks bottom out here, or are we in for a full-on retrace to the December lows?
Unfortunately, recent events have conspired to point to the latter.
The United States has now declared trade wars against all neighbors and allies around the world: China, Mexico, Europe, and Canada. On Friday, it announced 25% punitive tariffs against Mexico before NAFTA 2.0 was even ratified before Congress, thus rendering it meaningless. Businesses are dropping like flies.
As a result, GDP forecasts have been falling off a cliff, down from 3.2% in Q1 to under 1% for Q2. The administration’s economic policy seems to be a pain now, and more pain later. It is absolutely not what stock investors want to hear.
If you are a business owner now, what do you do with the global supply chain being put through a ringer? Sit as firmly on your hands as possible and do nothing, waiting for either the policy or the administration to change. Stock investors don’t want to hear this either. The fact that stock markets entered this cluster historically expensively is the fat on the fire.
Having hummed the bear national anthem, I would like to point out that stocks could rally from here. We enter a new month on Monday. There will be plenty of opportunities to make amends and the G-20 meeting which starts on June 20. This should provide a backdrop for a rally of at least one-third of the recent losses, or about 600 points.
But quite honestly, if that happens, I’ll be a seller. The economy is doing the best impression of going down the toilet that I can recall, and that includes 2008. Only this time, all the injuries are self-inflicted.
As the trade war ramped up, China moved to ban FedEx (FDX) and restrict rare earth exports (REMX) to the US essential for all electronics manufacture. Most modern weapons systems can’t be built without rare earths. The big question in investors' minds becomes “Is Apple next?”
The OECD cut its global growth forecast from 3.9% to 3.1% for 2019 because of you know what. Stock markets are now down for their sixth week as the 200-day moving average comes within striking distance.
There was more bad news for real estate with April Pending Home Sales down 1.5%. If rates this low can’t help it, nothing will. Where are those SALT deductions?
The bear market in home prices continued in March with the Case Shiller CoreLogic National Home Price Index showing a 3.7% annual price gain, down 0.2%. Home price in San Francisco is posting negative numbers. When will those low-interest rates kick in?
The bond market says the recession is already here with ten-year interest rates at 2.16%, a new 2019 low. German bunds hit negative -0.21%. JP Morgan (JPM) CEO Jamie Diamond says the trade war could cause real damage to the US economy.
US Capital Goods fell out of bed in April, down 0.9%, in another important pre-recession indicator. No company with sentient management wants to expand capacity ahead of an economic slowdown.
Despite all the violence and negativity, the Mad Hedge Fund Trader managed to crawl to new all-time highs last week, thanks to some very conservative positioning on the long side in the right names.
Those would include Microsoft (MSFT), Amazon (AMZN), and Tesla (TSLA). All of these names were down on the week, but the vertical bull call spreads were up. You see, there is a method to my madness!
Global Trading Dispatch closed the week up 16.30% year-to-date and is up 0.51% so far in May. My trailing one-year declined to +19.71%.
The Mad Hedge Technology Letter did fine, making money on longs in Microsoft (MSFT) and Amazon (AMZN). Some 10 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.
My nine and a half year profit jumped to +316.55%. The average annualized return popped to +33.32%. With the trade war with China raging, I am now 70% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.
I’ll wait until the markets enjoy a brief short-covering rally before adding any short positions to hedge my longs.
The coming week will be a big one with the trifecta of big jobs reports.
On Monday, June 3 at 7:00 AM, the May US Manufacturing PMI is out.
On Tuesday, June 4, 9:00 AM EST, the April US Factory Orders are published.
On Wednesday, June 5 at 5:15 AM, the May US ADP Employment Report of private hiring trends is released.
On Thursday, June 6 at 5:30 AM, the April US Balance of Trade is printed. At 8:30 Weekly Jobless Claims are published.
On Friday, June 7 at 8:30 AM, we learn the May Nonfarm Payroll Report is announced which lately has been incredibly volatile.
As for me, I am going to be leading the local Boy Scout troop on a 20-mile hike with a 2,500-foot vertical climb in the Oakland Hills. Hey, you never know when Uncle Sam is going to come calling again. I need to stay boot camp-ready at all times.
At least I can still outpace the eleven-year-olds. I’ll be leaving my 60-pound pack in the garage so it should be a piece of cake.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Hot Tips
May 31, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Another New Tariff War Crushes Stocks, with an out-of-the-blue 5% tax to hit Mexican imports next weekend to battle illegal immigration. American manufacturing is thrown into turmoil. Click here.
2) Oil Gets Crushed, taking oil stocks into a swan dive. Trade wars, US overproduction, what’s not to panic about? A great entry point for high-yield master limited partnerships is setting up. Buy (AMPL) on capitulation day with an 8.06% yield. Click here.
3) Inflation Rises, with Personal Income Expenditure up 0.3%, a 0.3% high. It looks like the Fed’s theory that low inflation is “transitory” is holding water. Click here.
4) Uber Loses $1 Billion in Q1, on $3.2 billion worth of revenues. However, (UBER) is one of the few stocks UP today. The company is delivering a staggering 17 million rides a day. Click here.
5) The Average Dow Return in a Pre-Election Year is 15.8%, with dividends, but we’ve never had one during a trade war. The market is going to have to peddle hard to make that much this year, with the Dow now up only 7.26%. Click here.
Published today in the Mad Hedge Global Trading Dispatch:
(JUNE 21 AUCKLAND NEW ZEALAND STRATEGY LUNCH)
(MAY 29 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (SDS), (SPX), (FXI), (CYB), (PYPL), (SQ), (V), (AMEX), (MC), (GS), (JPM), (C), (NVDA), (MU),
(AMD), (COPX), (FXB) (REMX)
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
May 31, 2019
Fiat Lux
Featured Trade:
(FRIDAY, JUNE 21 AUCKLAND, NEW ZEALAND GLOBAL STRATEGY LUNCH)
(MAY 29 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (SDS), (SPX), (FXI), (CYB), (PYPL), (SQ), (V), (AMEX), (MC), (GS), (JPM), (C), (NVDA), (MU), (AMD), (COPX), (FXB) (REMX)
May 29 Biweekly Strategy Webinar Q&A
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 29 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Why haven’t you added any short positions?
A: My floor is littered with trade alerts on short positions that didn’t get executed because the market fell apart too fast. In fact, that happened just yesterday; I tried to buy the Russel 2000 June $155-$160 vertical bear put spread but the rally only lasted essentially 10 minutes so there was no way to get it off.
Q: Would you buy United States US Treasury Bond Fund (TLT) at this point?
A: Please, have you learned nothing? A ten-point move up in weeks is where you sell, not buy! We last bought the (TLT) at $118 and we’re now at $130. The idea of buying on top of a ten-point rally is a great way to simply throw away money. So, no, I would not buy the (TLT) at this point.
Q: What is your opinion on the Fed backstopping the market with accommodative policy stance?
A: The bond futures are already indicating a 50% chance of a half-point rate cut by the end of the year, and an 88% chance of a 25-basis point cut by the end of the year. So, the market is already doing what the Fed should do and it’s having no impact whatsoever. If we’re really going into a recession, the Fed can take interest rates to zero and still it will provide no support for stocks because 1) Interest rates have been so low for so long, they’re no longer much of a factor in the economy 2) Falling stocks trump cheap money all day long, and if earnings are collapsing because of the trade war (which they are), even negative interest rates from the Fed wouldn’t support the market. I have a feeling that’s what we’re rolling into this summer.
Q: What is your target for the bond on the upside and the downside on yield?
A: My immediate target is $133 on the (TLT). That’s where I might entertain a short position, but even then, it would be something very cautious like the June $137-$140 vertical bear put spread. And my downside yield target is 2.05%—that’s only 15 basis points away, or three full points in the (TLT). So, we’re getting close to the most extreme upside targets in the bond market.
Q: Would you buy the ProShares Ultra Short S&P 500 ETF (SDS)?
A: Yes, but only on a rally—now would be a terrible time. We could get a rally into the month's end on Friday. If we do, selling the close or buying the -2X inverse bear (SDS) would be a good idea. If the (SPX) recovers one third of its recent loss, or 65 points from yesterday’s low, that would be a good entry point on the short side. Up two-thirds and you double up. Above that and you’re wrong.
Q: Copper producer Freeport McMoRan (FCX) is lagging again; is it time to buy?
A: No, FCX is getting slaughtered by collapsing copper demand from a slowing Chinese economy. You should note that if the Chinese say growth is at 6%, what you’re really looking at is more likely growth of about 3%. These are some of the lowest growth rates China has seen 20-25 years.
Q: CNBC and FOX are claiming today’s drop was caused by the Mueller statement on his report. Do you buy that?
A: No, absolutely not. That’s absolute garbage. The only important or relevant news for me right now is the whole trade war news flow.
Q: I know you’re not crazy about selling naked options, but I just sold 50 X Tesla (TSLA) August $100 puts for $20,000 in premium. I like this trade for income and would gladly own Tesla at a $100 long-term.
A: I would do that trade all day long. The only issue there is whether you have the margin to hold the position like this if you get a move all the way down to say $150 or $125, because margin requirements tend to double and triple when markets start to fall sharply. Sounds like you are a Tesla owner. The S, the X, or the 3?
Q: What is your gut feeling on which trade issues will actually resolve?
A: None. The Chinese (FXI) are actually in a very strong position. They would settle for going back to the status quo as of two years ago and nothing else. The U.S. is only 25% of the world economy, and China is still trading with the other 75%; they feel they can withstand the rest of the current presidential term.
Q: Banks are performing terribly—is this a chance to get in?
A: No, banks will continue to perform terribly. We now have an inverted yield curve during which banks basically lose money hand or fist. They’re also being replace by Fintech, which is PayPal (PYPL), Square (SQ), and all the credit card companies. I would much rather own a Visa (V), American Express (AMEX), or Mastercard (MC) than Goldman Sachs (GS), JP Morgan (JPM) or Citibank (C). That’s where the money is going.
Q: Is it time to start adding chip stocks like Nvidia (NVDA), Micron Technology (MU) and Advanced Micro Devices (AMD)?
A: No, this sector really looks like it wants to retest the December lows—chip prices are falling off a cliff, and the Chinese are banning the import of specific American made chips. It’s a major predictor of global recession and victim of the global trade war. Given that companies like Micron get 50% of their business from China, that is not good news. This has the makings of a major meltdown.
Q: Would you put on the same Tesla vertical bull call spread right here? The June $140-$150?
A: Yes, I would. Now it’s even lower risk because you have only 17 days left until the June 21 expiration.
Q: When will gold start to perform?
A: I’m not sure. With all the horrible things going on in the world right now, it’s just not happening. I don’t know why, but I think it eventually will. Gold is now trading like a commodity and not a precious metal. It’s tracking perfectly with other commodities like copper (COPX), which have been terrible. I think the market is wrong, but I don’t know when it will turn around.
Q: How can one short the Chinese currency, the yuan?
A: Very simple. The Wisdom Tree Chinese Yuan Strategy Fund (CYB) is the ETF on yuan, so just sell short the (CYB).
Q: If Trump caves on the trade deal, what effect will that have on things?
A: If the cave comes in the form of a treaty-like agreement that gets signed, the market will rally. Presumably, all the 25% punitive tariffs will disappear immediately, and we should have a big resurgence in the economy. Otherwise, it will continue to weaken. We need a Chinese trade deal to pull the US economy out of an imminent recession.
Q: What happens to the pound (FXB) in a hard Brexit?
A: If there is a “No Deal”, Brexit the United Kingdom would be committing economic suicide. It would gain no preferential tariffs outside the European Community. In that case, the pound goes to parity against the dollar, or 1:1. The last time that happened in 1984, I bought a mansion in London next door to Jacob Rothschild for $500,000. Today it is worth $20 million. Maybe you should do the same.
Q: Is it a good time to invest in rare earth metals?
A: Yes, but the second the trade war ends, those things are going to collapse. And as we’ve learned during the last 8-year bear market in the rare earths, liquidity is terrible on the down side. Take a look at the Van Eck Vectors rare Earth/Strategic Metals ETF (REMX). It was issued at the top of the last bubble and is up 15.67% since the trade war escalated.
Good luck and Good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
