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Google's Grand China Play

Tech Letter

There is light at the end of the tunnel.

A glimmer of hope is better than nothing.

Stolen IP was yesterday's story.

The administration's attempts to stick China with the bill is a waste of time.

The stock market is forward-looking and that is what I focus on when writing the Mad Hedge Technology Letter.

American tech companies want to turn over this bitter page of history and construct a fruitful future.

Ironically, it could be no other than American large tech companies that solves this trade misunderstanding by embracing Chinese tech instead of dragging them through the embers of political chaos.

That is what this groundbreaking partnership between Alphabet (GOOGL) and China's second largest e-commerce company JD.com (JD) is telling us.

If American and Chinese tech agree to fuse together through different M&A activity, strategic partnerships, and engineering projects, slapping penalties on your own interests would be without basis.

Albeit gone are the yesteryears of complete ownership on the other's turf, a medium ground could be found to satisfy both parties.

Alphabet's $550 million investment will give it 27 million shares of JD.com Class A shares equating to a 1% stake in JD.com.

JD.com products will now be hawked on Google Shopping, a platform giving users a chance to compare different price points from various sellers.

JD.com's fresh links with Silicon Valley's original powerhouse is timely because its business-to-consumer retail sales have slightly dipped in form from 27% last year to an underwhelming 25% in the first quarter of 2018.

Alibaba (BABA), the Amazon of China, is the 800-pound gorilla in the room and has a stranglehold on this market, carving out a robust 60% of sales from business to consumer retail.

Chinese companies have never worried about foreign companies seizing market share in China because they know the rigid operating environment mixed with "cultural" barriers will lead to a rapid demise.

Chinese firms are channeling their distress toward local competitors that understand the market as well as they do and number in the 100s in any one industry.

This is also a huge bet on the Chinese consumer who has put the world economy on its back creating the lions' share of global growth for the past 10 years.

Do not bet against China and the Chinese consumer.

Alphabet is taking this sentiment to the bank by integrating part of a premium Chinese tech firm into its own top line performance.

This investment would not happen if Alphabet believed the trade war could turn draconian cannibalizing each other's profit engines.

Alphabet has obviously been reading the tea leaves from the Mad Hedge Technology Letter as I identified China's huge competitive advantage in Southeast Asia and the huge potential for Chinese companies that migrate there.

The pivot toward Southeast Asia was the deal clincher for Alphabet and rightly so.

Alphabet has also invested in opening an A.I. (artificial intelligence) lab in Beijing showing its determination to extract a piece of the pie from China and ensuring their brand power is maintained in the Middle Kingdom.

Google search has been shut down on mainland China since 2010. Therefore, Alphabet needs to find alternative ways to benefit from the Chinese consumer and increase its presence.

The writing on the wall was when Baidu (BIDU) came to the fore with its own Chinese version of Google search.

Opportunities on the mainland have been scarce ever since the appearance of Baidu.

Apple (AAPL) has been the premier role model in China successfully juggling the complexities of the Chinese market. A big part of its staying power is offering local Chinese jobs.

Not just a few jobs, but millions.

As of April 2017, an Apple press release stated, "Apple has created and supported 4.8 million jobs in China" which is almost three times more than in America.

Apple deploys much of its supply chain around the mainland and taking down Apple in a trade war would strip millions of Chinese jobs in one fell swoop.

Not only that, Apple has deeply invested in data centers located in China and opened research centers in Shanghai and Suzhou.

Foxconn, a company responsible for assembling iPhones in mainland China, employs 1.2 million alone.

Alphabet would be smart to follow in the same footsteps, effectively, morphing into a hybrid Chinese company employing locals in droves and allowing millions of Chinese to earn their crust of bread through local factories.

Let me be clear: This would not hurt its business back at home.

It is also wrong to say that China is saturating because the 6.8% annual growth rate in China is a firm vote of confidence for Chinese discretionary spenders.

However, instead of competing head to head under the scrutiny of Chinese regulators, it is much more sensical to copy SoftBank's Masayoshi Son's lead when he invested $25 million in Jack Ma's Alibaba in 1999.

SoftBank's 1999 investment is now valued at more than $30 billion as of the current share price today.

Yahoo later joined the party in 2005, investing $1 billion into Alibaba and that stake is worth many times over.

Instead of fighting through cultural norms and fighting against the throes of an exotic business environment, paying for a stake and leaving its nose out of it has shown to be demonstrably effective.

Partnerships complicate the relationship, but if management can lock down each side's commitment to the very T, collaboration could spur even more innovation benefiting both countries and bottom lines.

China has draconian Internet controls put in place. American tech companies aren't up to snuff with cultural maneuverability to navigate through these shark-infested waters.

Better to pay for a stake and pick up the check after the market close.

Another winner in this deal is tech valuations, which has been the Cinderella story of 2018.

Although American tech companies will probably never be able to own 100% of a Chinese BAT. However, allowing these types of investments to go ahead is certainly bullish for equities.

Tech is still the sector lifting the heavy weight stateside and promoting innovation through collaboration will do a great deal to win the hearts and minds of Chinese people, companies and government.

As much as China hates the stain to its image of this nebulous trade war, it still deeply respects and admires large-cap American tech companies.

Chinese Millennials particularly have a deep love affair with Tesla's Elon Musk. They are captivated by his braggadocio, which they find appealingly exotic and captivatingly un-Chinese.

Through this partnership, JD.com will learn heaps about cutting-edge ad-tech and is guaranteed to apply the know-how to its home user base. In return, Alphabet will get deep insights of how JD.com controls the entire logistical experience and how a Chinese tech behemoth operates its supply chain.

The nuggets of information pocketed will help Alphabet compete more with Amazon back at home.

This is a win-win proposition.

Adding even more cream on top, enhanced brand awareness by joining together with Google could catapult JD.com into the shop window of America's consciousness.

Up until today, JD.com is hardly known about in the West except for specialists that avidly follow technology like the Mad Hedge Technology Letter.

I reiterate my stance of not buying into Chinese tech companies, and readers would be better served buying Microsoft (MSFT), Amazon (AMZN), and Netflix. (NFLX)

It makes no sense to trade stocks mired in the heart of a trade war.

As much as I love Alibaba as a company, it has been trading in a range because of the whipsawing headlines released in the press.

However, I can stand from afar and admire how the Chinese BATs have advanced in such a short amount of time.

If American tech and Chinese tech merge to the point of unrecognizability, consolidation could create a super tech power comprising of mixed Chinese and American interests.

Instead of bickering at each other, other solutions look to be more compelling.

The world's economy needs a healthy Chinese economy and vibrant Chinese consumer.

If the Chinese economy ever fell off a cliff, you can kiss this nine-year equity bull market goodbye, and the Mad Hedge Technology Letter would turn extremely bearish in a blink of an eye.

Therefore, America has a large stake in not alienating the Mandarins to the point of disgust.

I am still bullish on equities, but vigilance is the name of the game for short-term traders.

Package Delivery!

_________________________________________________________________________________________________

Quote of the Day

"My belief is that one plus one equals three. The pie gets larger, working together," Apple CEO Tim Cook said about its operations in mainland China and working with the Chinese Communist government.

June 19, 2018

Tech Letter

Mad Hedge Technology Letter
June 19, 2018
Fiat Lux

Featured Trade:
(TRAVIS IS BACK!),
(UBER), (RDFN), (Z), (LEN), (CRM), (MSFT), (AAPL)

Travis is Back!

Tech Letter

Travis Kalanick is back in full force after his Uber fiasco.

His creation kicked him to the curb preferring a more rigid approach to corporate governance as the 2019 IPO draws closer.

It didn't take much time for him to take stock of his piggy bank.

Yes, the $1.4 billion payout he received means he has nothing to do with Uber anymore.

Some piggy bank.

Travis intends to wield this wad aggressively using his new fund "10100" as his finance vehicle to pounce on hot, new tech names.

Travis doesn't know any other way, and investors should be alert to where he turns to find his new Uber and his new baby.

Future foes should understand Kalanick is one of the most feared disruptors on the face of the earth.

He co-founded Uber in 2009 growing it into the premier transportation platform.

The whirlwind few years launched him from a nobody to one of the premier tech names in Silicon Valley.

So, what's the deal?

What I can tell you is that house prices are about to get a whole lot pricier and there is nothing you can do about it.

Travis Kalanick's investment into house flipping app Opendoor will be the first stage of a torrential stampede of tech capital flowing into this sector.

More importantly, it's a sign of intent by Kalanick.

The real estate industry is the unequivocal prehistoric dinosaur that hasn't changed for decades.

It's almost a matter of time before the process of buying a house becomes digitized, either partially or fully.

Remember, Uber functions as a broker app matching drivers and passengers through a platform built on algorithmic software.

It would make logical sense for tech companies to attack the low-hanging fruit - meaning every industry that places brokers at the heart of business.

The broker app software is tried and tested with a gold stamp of approval. It works, and tech executives understand how to monetize the data.

Traditional brokers would get pummeled in this scenario, as the data applied to a new real estate broker app would eclipse anything a real human would be able to accomplish removing human error.

Real estate is next on disruption pecking order, and tech is coming for its bacon because of the huge sums of money associated with American real estate.

The real estate industry is not a scooter sharing business and requires boat loads of money to get ahead.

Tech has the cash but needs to figure out execution and its future road map.

The bulk of tech capital has been funneled into M&A that has seen tech companies pay multiples above what were guessed as fair value.

Share buybacks have been another hot source of investment.

Opendoor is a house-flipping firm intent on changing the status quo.

The business model entails snapping up distress properties, fixing them up, and selling them for a profit.

Opendoor receives a 6% commission for facilitating this whole process.

Opendoor has already served 20,000 customers saving more than 400,000 of prep time.

It is already on the hook for $1.5 billion in loans. SoftBank's vision fund is knocking on the door eager to become the next investor.

In 2016, this company was valued at $1 billion and after the latest round of financing giving Opendoor another $325 million, that number has crept up to $2 billion.

I have heard from solid sources that the SoftBank capital could be delivered in the next few months, likely paying another solid premium boosting tech valuations across the board.

Paying up has been a universal theme in 2018.

Microsoft's (MSFT) purchase of GitHub and Salesforce's (CRM) purchase of MuleSoft seem like overpaying but appear cheap in hindsight.

With the new cash ready to deploy, Opendoor seeks to expand to 50 cities by 2020, a swift upward jolt from its current 10 cities.

Not only will tier 1 cities feel the brunt of this new development, Opendoor plans to go into the lesser known cities and plans to double its staff from 650 to 1,300 in the upcoming year.

Kalanick caught onto this investment opportunity after one of his former Uber minions, Gautam Gupta, made the jump to Opendoor as COO and liaised CEO Eric Wu with Kalanick to hash out a deal.

It's nice to have friends in high places as Kalanick knows very well.

Even traditional home builders are getting in on the venture capitalist act.

Lennar was one of the investors in the latest round of Opendoor investment, underscoring the existential threat these traditional companies face.

It makes more sense to partner now and form a budding relationship than get utterly wiped out down the road.

Uber hopes to deploy this strategy with Waymo as Kalanick's former company knows it will never possess superior self-driving technology over Waymo.

The Lennar investment also gave Jon Jaffe, the COO of home builder Lennar, a seat on Opendoor's board.

Opendoor is the first serious tech foray into the housing business. It is initiating business on the periphery by focusing on fixer uppers.

This will allow Opendoor to cut its teeth and learn more about the industry before it migrates into higher margin business such as downtown condos that Millennials love.

A swift migration of other tech names will briskly follow into this undisrupted industry if Opendoor can pry open its floodgates.

Fixing up distressed houses is the gateway into brokering and the holy grail of constructing.

Tech could eventually wipe out everyone and control the whole process just like what investors have seen in the transportation industry.

I can imagine a future where tech companies will be the best firms to construct smart houses, which all houses will eventually become.

One massive aftereffect is that the average quality of housing will rise dramatically in all metropolitan areas.

Once the data amasses, Opendoor will be able to identify every property from where it can extract value allowing America to transform into a nation of pristine, smart houses.

Renovating a house and selling it will boost the prices of current houses.

Effectively, tech with gentrify housing creating higher quality but higher priced properties.

Millennials, who have had an awful time jumping on the property ladder, will have an even more difficult task finding a starter home if every starter house turns into a beautiful Tuscan-styled villa from a shabby shed.

Vice-versa, beautiful Tuscan-styled villas that cannot be "flipped" will become smart homes creating even more demand for IoT smart products and higher prices per square foot.

Andreessen Horowitz, a venture capitalist firm based in Menlo Park, California, has been one of the avant-garde tech investors seizing stakes in Twitter, Facebook, Skype, Coinbase, and Lyft.

And these were just some of its investments before 2014!

An industry where Travis Kalanick, SoftBank, and Andreesen Horowitz are piling in must have real estate agents shivering in their wake.

If the general trend keeps up, the Oracle of Omaha Warren Buffett could be next on this powerful list.

He usually likes to buy things he understands with healthy cash flow. I am sure he understands real estate more than Apple (AAPL), in which he had no problem investing.

Traditional home builders and real estate agents aren't the only players that could be left in the dust.

Zillow (Z), the online real estate database company, reacting from the Opendoor threat launched its new business to buy and sell homes.

It was only three years ago that Zillow CEO Spencer Rascoff determinedly hunkered down telling investors "we sell ads, not houses."

Innovation, tech disruption, and competition changes everything.

The stock sold off hard due to the exorbitant costs related to buying homes on the announcement of buying and selling houses.

Margins will get massacred in this scenario, but I applaud the decision to move up higher on the value chain diminishing the existential threat.

This whole industry is about to be flipped on its head, and the winners will be the most innovative companies that incorporate data best.

Rascoff further expanded saying, "I can say without exaggeration, that no company understands the American homebuyer and home seller better than Zillow Group."

Zillow is 12 years old and the12-year treasury trove of data will give it an optimal chance to pivot from selling ads to buying and selling houses.

Seattle-based Redfin (RDFN), Zillow's arch nemesis competitor founded in 2004, has an even larger treasure trove of data dating back 14-plus years and has moved in the same direction.

Redfin was anointed the top tech company to work for in Seattle in 2017 by Hired.com.

There is enormous potential to add another monstrous business to Redfin and Zillow's top line.

The real estate industry is next in line to be digitized, and the Mad Hedge Technology Letter will be the first to know when it's time to dip your toe in.

_________________________________________________________________________________________________

Quote of the Day

"As a tech entrepreneur, I try to push the limits. Pedal to the metal," - said former cofounder of Uber Travis Kalanick.

June 18, 2018

Diary, Newsletter

Global Market Comments
June 18, 2018
Fiat Lux

Featured Trade:
(TEN REASONS WHY APPLE IS STILL GOING TO $220),
(AAPL)

Ten Reasons Why Apple is Still Going to $220

Diary, Newsletter

Here it is mid-June, and Apple is already closing in on my 2018 target of $200. Indeed, with a market capitalization today of $930 billion, Apple is on the verge of becoming the world's first $1 trillion publicly traded company.

And here's the really great thing about this year for Apple bulls. If you had the right cajones you had a chance to load the boat just above $150 only five weeks ago.

Now for the good news. The best is yet to come. In fact, there are 10 reasons why Apple shares should hit my lofty target sometime this year.

1) Share buybacks are first and foremost. With $280 billion worth of cash in the bank abroad, and two thirds of that committed to buy back Apple stock, shareholders essentially have a free put option.

Indeed, you could see the company's invisible hand in the marketplace during the recent correction, soaking up shares at every opportunity. We won't learn the true numbers until the next quarterly earnings report in August.

2) Valuation is still the overwhelming factor driving institutions into Apple stock. With a price earnings multiple of 18X and a dividend yield of 1.40%, Apple is trading not only at a discount to the main market, but a discount to most of tech as well. No one ever got fired for buying Apple, at least not recently.

3) Apple's sales are as good as ever. The expected draw down in between new phone launches is proving less than expected. All of the channel checks suggesting a bigger drop have proved unfounded.

4) The rest of technology is on fire. Even if Apple was stumbling now, which it isn't, it would get dragged up by the meteoric moves seen in the rest of the FANGs.

5) The administration's nixing of the Broadcom (AVGO) takeover of QUALCOMM (QCOM), protects the principal supply of propriety chips for Apple phones safe from foreign interference. Broadcom could have chopped the research budget or transferred crucial technology to foreign competitors.

6) Apple is broadening its product lines, shifting to a new business model that delivers multiple new phones at the same time. This will include low-priced models that will compete in new markets such as India, as well as go head to head with the market share leaders, Samsung. This will increase market share and profitability.

7) While Apple possesses only 8% of the global cell phone market, it accounts for a staggering 92% of cell phone profits. Apple effectively has a monopoly on cell phone profits.

8) Its new lease program promises to deliver a faster upgrade cycle that will allow higher premium prices for its products and demand more phones. That will bring larger profits.

9) Apple continues to inexorably move into new products and services. While the company was late with the HomePod to compete against Amazon's (AMZN) Alexa and Alphabet's (GOOGL) Google Home, integration with the rest of the Apple ecosystem will enable the company to have the last laugh. Watch out for Apple Pay. Health care is another big target area.

10) Standards of living are rising worldwide. And guess what the first thing a newly enriched middle class does around the planet? They dump their Samsung Galaxies and Google Androids and join the iPhone club for the enhanced status alone.

I Hear Apple is Diversifying

June 18, 2018

Tech Letter

Mad Hedge Technology Letter
June 18, 2018
Fiat Lux

Featured Trade:
(DON'T WORRY ABOUT THE BATS),
(BIDU), (BABA), (AMZN), (AAPL), (MGI), (NVDA), (AMD), (GOOGL), (FB)

Don't Worry About the BATs

Tech Letter

The Chinese BATs (Baidu, Alibaba, and Tencent) are China's response to the American FANG group.

It's one of few sectors outperforming the vigorous American tech sector, and valuations have soared in the past year.

Former English teacher Jack Ma founded the Amazon (AMZN) of China named Alibaba in April 1999, which has grown to become one of the biggest websites on the Internet.

This company even has a massive cloud division that acts in the same way as Amazon Web Services (AWS).

Alibaba also has Alipay on its roster, the fintech and digital payments subsidiary of Alibaba.

Baidu, led by Robin Li, is the de-facto Google search of China and is entirely tailored for the Chinese market without English language support.

Tencent, created by Ma Huateng, has an assortment of businesses from social media, instant messaging, online gaming, and digital payments.

Tencent's WeChat platform is the lynchpin acting as the gateway to the robust Tencent eco-system.

The BATs have heavily invested in autonomous vehicle technology set to roll out in the coming years.

These companies are some of the biggest venture capitalists in the world throwing around capital like Masayoshi Son's SoftBank.

Alibaba has seen its share price rocket from $135 in June 2017 to $206.

Baidu has also seen huge gyrations in its share price elevating from $174 in June 2017 to $270.

Tencent, public on the Hong Kong Hang Seng Index, has gone from $273 HKD (Hong Kong dollars) to $412 HKD.

And this is all just the beginning!

An economy growing a stable 6.5% per year with companies able to scale to a mind-boggling 1.3 billion people is something of which to take notice.

China hopes to wean itself from its industrial heritage betting the ranch on a rapidly expanding tech sector.

Does this put China on a collision course steamrolling toward the American FANGs?

Highly possible but not yet.

Even though the BATs modus operandi has been to follow in the footsteps of the FANG's business model, they do not directly compete.

Ant Financial, the fintech arm of Alibaba, was blocked from purchasing MoneyGram International (MGI), effectively, closing any doors leading to the lucrative American digital payments industry.

This also meant curtains for WeChat, the multi-functional app that half of the Chinese use as a digital wallet, in the digital payments space.

The Committee on Foreign Investment in the United States (CFIUS) has made it crystal clear that BAT's capital will be scrutinized more than ever before because of China's open policy of transferring Western technology expertise to the mainland for the purpose of leading the world in technology.

China cannot have its cake and eat it.

The first stumbling block is that the American market does not suit the BAT's FANG business model with Chinese characteristics.

For example, the only other market Baidu search operates in is Brazil.

It has leveraged itself to the Chinese consumer whose purchasing power has spiked from its burgeoning middle class.

Another headwind is the lack of innovation caused by a rigid education system punishing freedom of thought in favor of rote memorization.

Innovation is American tech's bread and butter and investors pay up for this ingenuity that cannot be found elsewhere in the world.

This is also the reason why the BATs need to buy American technology and not the other way around.

Original concepts such as Uber and Airbnb were made in America first and Didi Chuxing and Tujia are rip-offs of these American companies.

The list is endless.

The BATs understand they cannot go head to head with American talent, but that does not mean they won't win out in the end.

To make matters worse, global tech talents do not want to work in China if they are reliant on America to develop something and copy it.

Why not just go work in Silicon Valley for a higher salary?

This was highlighted when the only tech talent to cross over to the other side quit in a blaze of glory.

Hugo Barra was poached from Alphabet in 2013, where he worked as vice present for the Android mobile operating system.

He was installed as the vice president of international development for smartphone maker Xiaomi, the Apple (AAPL) of China.

Barra suddenly threw in the towel at Xiaomi in 2017, offering a harsh critique stating, "What I've realized is that the last few years of living in such a singular environment have taken a huge toll on my life and started affecting my health."

Not exactly the stamp of approval the Mandarins were looking for.

In turn, China has focused its effort on recruiting Chinese-Americans who understand the working environment better and have roots or even family on the mainland.

The dire tech talent shortage is worse in China than Silicon Valley because Chinese tech companies have zero access to non-Chinese talent.

Even with a reverse in immigration policies by the administration, America continues to be the holy grail of tech jobs.

That is why you see hoards of Chinese, Indians, Russians, and every other country's best and brightest waiting in line to make the move.

Taiwanese American CEOs lead some of Silicon Valley's best companies such as the CEO for Nvidia (NVDA), Jensen Huang, and the CEO of Advanced Micro Devices (AMD), Dr. Lisa Su.

Only 1% of Baidu's revenues is extracted from American soil underscoring the BAT's China-first business model. Tencent isn't much better at 5%, and Alibaba heads the list at 11%.

Compare these statistics with Alphabet (GOOGL) making 53% and Facebook (FB) earning 56% of revenue from international sales.

Amazon is still very much an American business but 32% of revenue comes from international sales.

The bulk of this revenue is mainly from Europe where American large-cap tech companies are staunch mainstays.

China has focused on building out its business in Southeast Asia instead.

Those governments are cozy with Beijing and are willing to relinquish some sovereign influence to develop its poor digital infrastructure.

The nail in the coffin for potential BAT companies doing business in America is the total lack of data protection in China.

If you think what Facebook is doing doesn't make you sleep at night, the BATs are running riot with personal data in China.

Expect multiple attempts of hackers breaking into your email while your phone number is constantly harassed by spam messages and robo-calls galore.

This is a normal day in the life of a Chinese national and they are used to it.

China understands they are not ready to eclipse the juggernaut that is Silicon Valley.

The BATs are biding their time organically growing by investing into American tech firms helping their overall products and services.

The past five years have seen a gorge of American investment amounting to 95 deals totaling $27.6 billion.

However, this smash-and-grab investment party is effectively over because CFIUS has clamped down on exporting local technology.

Consequently, the BATs will continue to focus on what they know best - the Chinese market.

Southeast Asia is also ripe to become the next stomping ground for the BATs. Expect them to dominate in this region for years to come.

The runway is long in domestic China. The 6.5% annual growth is entirely biased toward these three companies to prolong their hearty growth trajectories.

The communist party even has a seat on the board at each of these companies highlighting another area of conflict if these companies dive head into the American market.

Let's just say corporate governance in China is a shell of what it is in America.

One day there could be an all-out battle for tech supremacy, but these Chinese companies would need some assurances they would likely come out on top.

That is hardly the case yet and they make way too much money by copying Silicon Valley.

_________________________________________________________________________________________________

Quote of the Day

"The leader of the market today may not necessarily be the leader tomorrow," - said Tencent founder and CEO Ma Huateng.

June 12, 2018

Diary, Newsletter

Global Market Comments
June 12, 2018
Fiat Lux

Featured Trade:
(THE LAST CHANCE TO ATTEND THE THURSDAY, JUNE 14, 2018, NEW YORK, NY, GLOBAL STRATEGY LUNCHEON)
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE),

June 11, 2018

Diary, Newsletter

Global Market Comments
June 11, 2018
Fiat Lux

Featured Trade:
(LAST CHANCE TO ATTEND THE WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE NEW WORLD ORDER),
(AAPL), (MU), (TWTR),
(I'M HITTING THE ROAD)

Market Outlook for the Week Ahead, or Welcome to the New World Order

Diary, Newsletter, Research

It seems like another day, another analyst downgrade for technology. The latest report came from Japan's Nihon Keizai Shimbun, which reported that Apple has asked parts suppliers throughout Asia to cut back parts shipments for its iPhones by 20%. Apple shares responded by falling by $5 to $190.

Granted, the global cell phone market has been flat for the past two years. What is new is that Apple has been extracting an ever-larger share of the global smart phone profit stream, now at a heady 92%, thanks to more expensive products with better functionality. That's what I'm focusing on.

We saw a similar downgrade for the chip sector days early, which cut $9 off the high beta play there, Micron technology (MU).

The bad news was enough to trigger a long overdue rotation from perennial leaders in technology toward laggard banks, retailers, materials, and consumer discretionary.

Remember, as long as no new net cash is coming into equities beyond share buybacks, the main indexes can't break out to new all-time highs. My 10-month range for the (SPY) lives!

It is normal to hear a rising tide of wailing from Cassandras decrying impending doom as we reach the end of an economic and stock market cycle. At nine years, this one is already the second longest in history. But we have six more years to run to top the market performance from 1949 to 1961.

Personally, I believe the current technology cycle has a minimum of one to two years to go, so there is more than ample time to make money in the sector.

Much media was focused last week on the G7 Meeting in Quebec City Canada, which appears to soon become the G6, ex the United States. Here we see the unfolding of another aspect of Trump's global strategy.

He wants to break up the American led post WWII order, which made us all wealthy and abandon Europe, Japan, and Australia as allies. This is what all the new trade wars against our friends are all about.

Instead, the NEW world order has us allied with Russia, Saudi Arabia, and a handful of Gulf sheikdoms. If carried out, it should shrink U.S. GDP growth by 1% to 2% a year, caused the mother of all stock market crashes, and greatly undermine the security of the United States.

My prediction is that it won't last. The market risk is zero for the short term, but enormous for the long term. I am not alone in these predictions.

There was another new world order emerging this week, and that the addition of Twitter (TWTR) this week to the S&P 500, replacing old line chemical company Monsanto (MON). I have to confess that I totally missed the Twitter turnaround, which has rocked from $14 to $45 in a year.

Maybe meeting Twitter employees during my nightly hikes on Grizzly Peak and meeting despairing Twitter employees who went up there to commit suicide had something to do with it. This kind of experience kind of puts one off a stock for life.

As for the Mad Hedge Trade Alert Service we are having another blockbuster month. I caught the upside breakout by the lapels and shook it for all it was worth with aggressive long positions in Microsoft (MSFT), Amazon (AMZN), Salesforce (CRM), Apple (AAPL), and the Biotechnology Index (IBB).

The result was to take the performance of the Mad Hedge Trade Alert Service to yet another all-time high. Those who signed up at any time in the past 12 months have to be extremely happy.

After one trading day, my June return is +6.24%, my year-to-date return stands at a robust 26.75%, my trailing one-year returns have risen to 62.14%, and my eight-year profit sits at a 303.65% apex.

This coming week will be all about the big Fed decision on interest rates on Wednesday.

On Monday, June 11, no data of note is released.

On Tuesday, June 12, the Federal Open Market Committee Meeting begins. At 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.

On Wednesday, June 13, at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST, the Fed is expected to raise interest rates by 25 basis points. At 2:30 Fed Chair Jerome Powell holds a press conference.

Thursday, June 14, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.

On Friday, June 15 at 9:15 AM EST, we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, I will be taking off on my 2018 Mad Hedge U.S. Road Show. See you at lunch.

Good Luck and Good Trading.

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