Page 1313 - Mad Hedge Fund Trader

Why You Should STILL Be Buying Facebook on this Dip

He did just enough.

He did 5% enough, but it should have been 10%.

That was the performance of the highly controversial data company Facebook (FB) in the wake of Mark Zuckerberg's (the aforementioned "he") testimony in front of politicians who failed to correctly pronounce his name let alone understand his business model.

But Zuckerberg did well.

Well enough that investors approved in droves.

Facebook shares tanked after the Cambridge Analytica scandal was disclosed, and the stock traded 16% below its February high.

The FANG stocks lost more than $200 billion in market value at one point when the headlines went viral.

Amazon (AMZN) and Netflix (NFLX) accounted for more than 30% of the S&P 500's 2018 gains in February, and their contribution has dipped to about 24% as of early April.

The leadership burden for large-cap tech is a resilient pillar propping up the equity market.

Let's get this straight - there has been no regulation as of yet but this moves forward any regulation that eventually was going to happen.

However, it could be a highly diluted version of any worst-case scenarios of which one could think.

The big question: Will earnings and guidance be sideswiped because of higher data costs?

And how many of the 2.2 billion MAU (Monthly Active Users) permanently deleted their Facebook accounts?

Facebook profile removals surged to 4,000 to 5,000 the first few days after the news hit and decreased to 2,000 per day in late March. The numbers further subsided to 1,000 at the start of April.

Deletions around the political testimony were clocking in between 1,000 to 2,000 per day.

To put this into perspective, the extirpation of accounts was only about 30% of the Snapchat rebellion where users quit in hoards because of a sub-optimal design refresh.

The media has done its best to sensationalize events and avoid the fact that hyper-targeting ad models has been around for years and has been used by various companies.

Facebook is not the only one.

Bottom line, there has been no material damage to user volume, and the testimony will empower tech because of Washington's botched question session.

Most of Facebook's profits come from less than 10% of user accounts.

Facebook is a one-trick pony with 98% of profits coming from ad revenue.

To add granularity, the bulk of revenue derives from developed nations mainly from North America, which make up more than 50%, and Europe at about 30% of total revenue.

Falling user engagement from the developed English speaking world would be a canary in the coal mine.

I am not talking about a few thousand profile deletions. However, a mass removal of 50,000 profiles or 100,000 profiles per day would throw Mark Zuckerberg into a tizzy.

If Facebook can convince users to stick around then Mark Zuckerberg is the ultimate winner.

With all the fearmongering, some facts get swept under the carpet. And it could be the case that many users are fine with Facebook possessing large swaths of their personal data.

In reality, users might prefer Facebook to Washington when it comes to possessing their personal information.

The performance of politicians lined up to interrogate Mark Zuckerberg was an unmitigated disaster for the political elite.

It is clear there is a competency issue with politicians. The generation bias has given us a fleet of politicians who have almost zero grasp of technology and its pervasive use in America's economy.

Many politicians showed a weak grasp of Facebook's profit engine.

Some politicians were more focused on Facebook's diversity policy than the real issue at hand.

Let's not forget Zuckerberg also controls 60% of voting rights through his accumulation of Facebook Class B shares and has an iron grip on any direction where the company traverses.

Any meaningful regulation costs will be passed onto the advertisers as a cost of doing business.

This is the key lever investors don't fully understand.

Facebook currently uses an auction-based system for ad pricing but could easily slip in stand-alone regulatory fees to compensate the extra costs.

The industries move from CPC (cost per click) to CPM (cost per impression) including duopoly playmate Alphabet (GOOGL) is a great strategy to pad profits.

The only real incurred cost to Facebook is the in-house DevOps team responsible for platform enhancement.

Facebook tried to experiment in 2016 by charging Facebook-owned smartphone messaging service WhatsApp users a $1 per year fee to use the messaging service.

It has done the groundwork to roll out a mass paid service.

Facebook later decided against this move as many users of WhatsApp are from undeveloped countries with no access to credit card payment services.

Zuckerberg is awkward. However, he has come a long way since his hoody days, even using smoke and mirrors to wriggle out of probing questions.

Half the "grilling" he received in Washington was met with the same vanilla answer saying that his team will get back to them.

The peak of evasiveness was Zuckerberg's response to a question about the willingness to change the business model in the interest of protecting individual privacy.

Zuckerberg stated he was "not sure what that means."

The hammering in Facebook shares was overdone.

It is obvious Washington is no match for large cap tech.

Facebook's upside trajectory has been sacrificed in the short term, but one could argue regulation was on the way - regardless of this data breach.

Regulation is a natural progression for an industry with almost no meaningful regulation.

Therefore, a little regulation for tech does not mean the end of tech.

Facebook is not going out of business. Not anytime soon.

Facebook earned revenue of $27.64 billion in 2016, on the back of $40.65 billion in 2017.

Facebook does not need to be "fixed" - it just needs a few bandages in place before it goes back onto the field.

These bandages will damage operating margins that are currently at 57% in Q4 2017, but their long-term fundamentals are still intact.

The wall of worry is unfounded and ad engagement is still solid.

Facebook is in store for record bottom- and top-line numbers when earnings come out. Ad revenue numbers and the guidance will be the key metric to digest.

Investors might want Zuckerberg to kitchen sink the quarter because most of the bad news is already priced into the stock and might as well dig out all the skeletons in the closet.

Regulation is positive for Facebook because Facebook and the rest of the FANGs are in the best position to confront the regulations. The worst case scenario is finding a backdoor way to navigate through the new rules just as the backdoor way of profiting through ad distribution.

The headline hysteria makes it seem like Facebook is about to go under and file Chapter 11.

The bar has been set so low for upcoming earnings that any reasonable guidance will be seen as a victory.

Advertisers have no choice but to pay for Facebook ads if they want to grow business - that has not changed.

Facebook is growing so fast that the CEO could not name the competition when he was asked at the hearing.

There is a huge short squeeze setting up for the next earnings report due out on April 25, 2018.

Lastly, WhatsApp recently surpassed 1.5 billion MAU with users sending more than 60 billion messages every day.

Remember that Mark Zuckerberg purchased WhatsApp when it had around 500 million MAU back in February 2014.

This service hasn't even started to monetize yet and was a genius piece of business for $19.3 billion in 2014.

The valuation is at least double to triple the price of purchase now but seemed ludicrously expensive when Facebook snapped it up at the time.

Facebook has bottomed out, and the added bonus is it is quite insulated from all the tariff chaos whipsawing the equity markets.

__________________________________________________________________________________________________

Quote of the Day

"I'm on the Facebook board now. Little did they know that I thought Facebook was really stupid when I first heard about it back in 2005."- said founder and CEO of Netflix Reed Hastings

MOT Follow-Up to Text Alerts (XOM)(SPX) Trade April 17, 2018

MOT Trades

While the Global Trading Dispatch focuses on investment over a one week to six-month time frame, Mad Options Trader, provided by Matt Buckley, will focus primarily on the weekly US equity options expirations, with the goal of making profits at all times. Read more

Trade Alert - (VXX) April 17, 2018 TAKE PROFITS

Trade Alert

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

April 17, 2018 - MDT Alert (KMI)

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to 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

Tech Trade Alert - (GOOGL) April 17, 2018 TAKE PROFITS

Tech Alert

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

Trade Alert - (GOOGL) April 17, 2018 TAKE PROFITS

Trade Alert

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

April 17, 2018 - MDT Pro Tips A.M.

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to 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

April 17, 2018

Diary, Newsletter

Global Market Comments
April 17, 2018
Fiat Lux

Featured Trade:
(HAS THE RECESSION ALREADY STARTED?)
(WHERE THE ECONOMIST "BIG MAC" INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (CYB)

Has the Recession Already Started?

Diary, Newsletter, Research

It started with a slow drip.

Then it became a trickle.

Now it is an undeniable torrent.

Negative economic data reports, once as rare as hen's teeth, have suddenly become as common as NRA bumper stickers at a Trump rally. The economic data flow has definitely turned sour.

Is this a growth scare? Or is it the beginning of a full-blown recession, the return of which investors have been dreading for the past nine years.

The data flow was hotter than hot going into January, taking the stock market to a new all-time high.

We only got final confirmation of this a few weeks ago, when the last report on Q4 GDP rose by 0.2% to 2.9%, one of the best readings in years.

Then the rot began.

At first it was just one or two minor, inconsequential reports here and there. Then they ALL turned bad. Not by large amounts, but by small incremental ones, frequent enough to notice.

The February Dallas Fed General Business Activity Index dropped from 28 to 21, the March Institute of Supply Management Manufacturing Activity declined from 61 to 59, while Services Activity shaved a point, from 59 to 58.

The big one has been the March Nonfarm Payroll Report - that printed a soft 103,000 - which was far below the recent average of 200,000.

As recently as this morning, the National Association of Home Builders Sentiment Index dropped a point from 70 to 69.

When you see one cockroach, it is easy to ignore. When it becomes a massive infestation, it is a different story completely.

The potential explanations for the slowdown abound.

There is no doubt that the Trade War with China is eroding business confidence, as is the secret renegotiation of the North American Free Trade Agreement (NAFTA).

Decisions on major capital investments by companies were a slam dunk three months ago. Now, many are definitely on hold.

There is abundant evidence that the Chinese are scaling back investment in the US and pausing new trade deals with American counterparties. They have been boycotting purchases of new US Treasury bonds for eight months.

The new import duty for Canadian timber is raising the cost of low-end housing, worsening affordability and causing builders to cut back.

Instead they are refocusing efforts on high-end housing where profit margins are much wider.

Shooting wars with Syria, North Korea, and Iran are permanently just over the horizon, further giving nervous investors pause.

And the general level of chaos coming out of Washington, including the unprecedented level of administrations firings and resignations, are scaring a lot of people.

Since I am a person who puts my money where my mouth is every day of the year, I'll give you my 10 cents worth on what all this really means.

Two weeks ago I started piling into to an ultra-aggressive 100% "RISK ON" trading book, loading the boat with a range of asset classes, including longs in financial and technology stocks, and gold and big shorts in the bond market.

My bet is that while however serious all of the above concerns may be, they pale in comparison with Q1 2018 earnings growth of historic proportions that is now unfolding, prompted by the December tax bill.

The second 10$ correction of 2018 had nothing to do with fundamentals. It was all about hot money retreating to the sideline until the bad news waned and the good news returned.

And so it has. Forecast Q1 earnings are now looking to come in above 20% YOY. These will be reports for the ages.

My bet has paid off in spades, with followers of my Mad Hedge Trade Alert Service up 10.70% so far in April, up +17.46% in 2018, and up a breathtaking 54.04% on a trailing 12-month basis. It is a performance that causes my competitors to absolutely weep.

If fact, the rest of 2018 could play out exactly as it has done so far, with frantic sell-offs following the end of each quarterly reporting period, followed by slow grind-up rallies leading into the next. Technology will lead the rallies every time.

Which means we may go absolutely nowhere in the indexes 2018, but have a whole lot of fun getting there. If you see this coming you can make a ton of money trading around it.

With our current positions, Mad Hedge followers could be up 25% on the year as soon as mid-May.

Which raises the question of, "When will the recession really start?"

My bet is sometime in 2019, when earnings growth downshifts from 20% to 10% or even 5%.

If this happens in the face of an inverting yield curve where short-term interest rates are higher than long-term ones, and a continuing trade war AND shooting wars, and broadening Washington scandals, then a recession becomes a sure thing.

A bear market should precede that by about six months.

So date those high-risk positions, don't marry them.

Where The Economist "Big Mac" Index Finds Currency Value

Diary, Newsletter, Research

My former employer, The Economist, once the ever-tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its "Big Mac" index of international currency valuations.

Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.

The index counts the cost of McDonald's (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.

What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai baht are cheap.

I couldn't agree more with many of these conclusions. It's as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas.

I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool than a speedy lunch.

The World's Most Expensive Big Mac