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The China Tariff Bombshell and Technology

With one little tweet, the state of technology and the companies that rely on the public markets that serve them went haywire.

U.S. President Donald Trump levied another 10% on the $300 billion that had not been tariffed up yet compounding the misery for anyone who has any vested interest in trade with mainland China.

The tariffs will take effect on September 1st.

How does this shake out for American technology?

Any brand tech name that has substantial supply chain operations can kiss their stay in the Middle Kingdom goodbye.

If management didn’t understand that before, then it’s clear as night that they need to shift their supply chain out of the reaches of the Chinese communist party.

The U.S. Administration tripling down on China being our archnemesis means that any sort of cross-border economic trade or cultural exchange will be viewed through the prism of warped geopolitics.

The U.S. President Donald Trump has in fact taken a page out of the Chinese playbook turning everything he sees and touches into a transactional tool for what he is pursuing at the time or in the future.

Specific companies facing the wrath of the tariffs are companies as conspicuous as Apple filtering down to the SMEs that make local business local.

Semiconductor chips are a huge loser in this new development as the price of electronic goods will rise with the tariffs.

If you want a name that lies in the heart of electronic consumer goods, then BestBuy (BBY) would encapsulate this thesis and unsurprisingly they were taken out to the back of the woodshed and taught a lesson dropping 10% on the news.

Any technology outfit that imports goods from China will be hit as well and this means semiconductor chips along the lines of Nvidia (NVDA), Intel (INTC), Western Digital (WDC) and Micron (MU) among others.

Chips are the meat and bones that go into end products like iPads and a slew of smart devices.

Demand will be hit because of the cost of producing these types of consumer products will rise.

The softness is showing up in the numbers with Apple’s iPhone revenue down 12% year-over-year.

Samsung of Korea also showed that this isn’t just an American problem with their semiconductor division’s operating profits down 71% year-over-year.

The Korean conglomerate is in a spat with the Japanese government over war crimes from the second world war causing the Japanese government to bottleneck the supply of chemicals needed to produce high-level semiconductor chips.

The export restriction will drag down SK Hynix display business who is one of the largest producers of DRAM chips and also a Korean company.

Consumers are also using their phones longer with Apple iPhone customers holding their device up to 4 years delaying the refresh cycle.

The company that Steve Jobs built will have to repurpose themselves for a brave new tech landscape that includes heavier regulation, trade tariffs, and device saturation.

When investors talk about the “low hanging fruit,” at this point, Apple isn’t one of them.

And if you think the services business is a cakewalk, ponder about how many apps and behemoths that spit out a whole lineup of apps.

Apple still has its ecosystem and should guard it with its life, this is the same ecosystem that can charge Google around $10 billion per year to slap on Google search as the primary search engine on Apple devices.

Expect tech to telegraph a deceleration in revenue for the last quarter and next year.

The tech environment is brittle at this point and uncertainty wafts in the air like a hot stack of pancakes.

 

 

July 25, 2019

Global Market Comments
July 25, 2019
Fiat Lux

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July 24, 2019

Mad Hedge Technology Letter
July 24, 2019
Fiat Lux

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Ciao Silicon Valley

Bridgewater Associates Founder Ray Dalio carefully articulates an economic landscape in which the unrelenting chase for short-term tech profits finally catches up meaningfully with the gyrations of tech shares.

All of this could come home to roost and the early manifestations can be found in the housing migratory trends.

The robust housing demand, lack of housing supply, mixed with the avalanche of inquisitive tech money will propel these housing markets to new heights and this phenomenon is happening as we speak.

Salesforce Founder and CEO Marc Benioff has lamented that San Francisco, where ironically he is from, is a diabolical “train wreck” and urged fellow tech CEOs to “walk down the street” and see it with their own eyes to observe the numerous homeless encampments dotted around the city limits.

The leader of Salesforce doesn’t mince his words when he talks and beelines to the heart of the issues.

After relinquishing some of his CEO duties to newly anointed Co-CEO Keith Block, Benioff will have the operational time and a wealth of resources to get on top of the pulse of not only tech issues but bigger picture stuff and he now has a mouthpiece for it with Time Magazine which he and his wife recently bought.

In condemning large swaths of the beneficiaries of the Silicon Valley ethos, he has signaled that it won’t be smooth sailing forever.

In tech wonderland, and he urged companies to transform their business model if they are irresponsible with user data.

The tech lash could get messier this year because companies that go rogue with personal data will face a cringeworthy reckoning as the techlash fury seeps into government policy and the social stigma worsens.

I have walked around the streets of San Francisco myself.

Places around Powell Bart station close to the Tenderloin district are eyesores littered with used syringes that lay in the gutter.

South of Market Street isn’t a place I would want to barbecue on a terrace either.

Summing it up, the unlimited tech talent reservoir that Silicon Valley gorged on isn’t flowing anymore because people don’t want to live there now.

This tech talent, equipped with heart-tugging stories from siblings and anecdotes from classmates getting shafted by the San Francisco dream, has recently put the Bay Area in the rear-view mirror for many who would have stayed if it were 20 years ago.

This is exactly what Apple’s $1 billion investment into a new tech campus in Austin, Texas and Amazon adding 500 employees in Nashville, Tennessee are all about.

Apple also added numbers in San Diego, Atlanta, Culver City, and Boulder just to name a few.

Apple currently employs 90,000 people in 50 states and is in the works to create 20,000 more jobs in the US by 2023.

Most of these new jobs won’t be in Silicon Valley.

Since the tech talent isn’t giddy-upping into Silicon Valley anymore, tech firms must get off their saddle and go find them.

The tables have turned but that is what happens when the heart of western tech becomes unlivable to the average tech worker earning $150,000 per year.

Driving out young people who envision a long-term future elsewhere than the San Francisco Bay Area forces Silicon Valley to adapt to the new patterns revealing themselves.

Sacramento has experienced a dizzying rise of newcomers from the Bay Area itself.

Some are even commuting, making that 60-mile jaunt past Davis, but that will give way to entire tech operations moving to the state capitol.

Millennials are reaching that age of family formation and they are fleeing to places that are affordable and possible to become a new home buyer.

These are some of the practical issues that tech has failed to embrace and to maintain the furious pace of growth that investors’ capricious expectations harbor.

Silicon Valley will have to become more practical adding a dash of empathy as well instead of just going by the raw and heartless data.

We aren’t robots yet, and much of the world still augurs to emotional decisions and disregards the empirical data.

But, instead of physical offices being planted in the Bay Area, the tech industry will heed way to the “spirit” of Silicon Valley with offices in far-flung places.

And remember that all of these new tech talent strongholds will need housing, and housing that an IT worker making $150,000 per year desires.

No wonder why San Jose real estate has dropped in the past year, people and their paychecks are on the way out.

 

 

July 19, 2019

Global Market Comments
July 19, 2019
Fiat Lux

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What’s Happened to Apple?

One of the great mysteries of the tech world has at last been answered.

Apple’s brand new spaceship-designed headquarter, one of the world’s most valuable buildings, has finally had a value put on it.

New figures released this week show the tech giant’s circular headquarters in Cupertino, CA was assessed at a breathtaking $3.6 billion by Santa Clara County for property tax purposes. The valuation doesn’t perfectly coincide with its market value — how much it would sell for — but is based off a detailed appraisal of the building, which opened in 2017.

If you include computers, furniture, and even farm equipment to take care of the property’s abundant peach trees, the figure rises to $4.17 billion for the fiscal year that ended in June, the assessor’s office said.

Beyond its giant 2.8 million-square-foot size, Apple Park’s high-end materials, abundant glass, and intricate design make it a standout in Silicon Valley. The building is so big it even has its own weather.

Unfortunately, the share prices of companies that spend billions on flashy new designer headquarters do not have a great history. Ride around Manhattan in an Uber cab and you’ll quickly understand that time has not been kind to the extravagant: the Chrysler Building, the Pan Am Building, and the AT&T building to name just a few.

Citicorp’s HQ, with its horizon-defining slant-edged roof, is still in business, but the stock is still down 75% from its pre-crash high. Is Apple headed in the same direction?

Looking at the share price performance of the past year, which has been zero, you might be forgiven for thinking so. Other tech stocks have risen by 50% or more during the same period.

Apple Park is among the world’s dozen most expensive buildings despite its relatively modest four-storey height.

America’s tallest spire, the 1,776-foot One World Trade Center in New York, cost $3.9 billion to build according to the Port Authority of New York and New Jersey which owns the building and has 3.5 million square feet. Singapore’s Marina Bay Sands resort reportedly topped $5 billion in costs, while Finland’s Olkiluoto 3 nuclear reactor exceeded $6 billion.

Saudi Arabia’s holy city of Mecca is home to two of the most valuable buildings in the world: the $15 billion Abraj Al Bait Towers and the $100 billion Great Mosque of Mecca.

Apple Park was assessed at more than twice the amount of Salesforce Tower, San Francisco’s tallest building, which was valued at $1.7 billion by San Francisco. Salesforce Tower has about half as much office space as Apple Park despite being 57 stories taller.

With property taxes in Santa Clara County running around 1.25%, Apple would owe around $50 million annually.

The building is a manageable expense for Apple’s profit machine. In its most recent quarter, Apple reported a mind-numbing $58 billion in revenue and $11.5 billion in net income.

Apple was Santa Clara County’s largest property taxpayer for the 2017-18 fiscal year, with $56 million in taxes paid.

Investors have been frustrated with Apple’s recent performance, although it did make back most of the 40% hickey it suffered last fall.

Its business plan seems well on track, shifting from a hardware company to one that focuses on software and services. If anything, the shift has been taking place faster than expected, with the cloud, iTunes, Apple Wallet, Apple Care, the App Store, and other services accounting for a growing share of earnings.

All will become clear when the company announces their Q3 earnings on Tuesday, July 30 after the stock market close.

No, I think the problem with Apple is that it is suffering from the China Disease. Employing a million people who produce 225 million iPhones a year, Apple is the preeminent hostage in the US-China trade dispute. That, undoubtedly, has been a dead weight on the shares.

However, after covering this field for half a century, I can tell that trade wars start, trade wars play out, and trade wars end. Unlike other trade wars, this one has a specific end date. That would be on Wednesday, January 20, 2021, or in 18 months, the date of the next presidential inauguration.

As for me, I am waiting to upgrade my current iPhone X until it includes 5G wireless technology early next year. I bet 225 million others are as well. Dump the trade war and Apple shares could rocket up towards my old long-term target of $250 a share in a heartbeat.

By the way, there is one other headquarter that may be about to join the dustbin of history. That would be 725 Fifth Avenue, NY, NY 10022, which has been appraised at a mere $371 million and carries a hefty $100 million in debt. In is now partly owned by the US Justice Department, which will soon sell its stake.

Locals know it as Trump Tower.

 

 

 

July 12, 2019

Global Market Comments
July 12, 2019
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July 5, 2019

Mad Hedge Technology Letter
July 5, 2019
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The Ball is in Netflix’s Court

Being as volatile as it is, investors are afforded ample opportunity to get into one of the premium tech stocks in the land Netflix (NFLX).

Chasing this one higher is a dangerous thought, as habitual 30% dips is part and parcel of being attached to this supreme online streaming stock.

December of 2018 gave you that sinking feeling when Netflix dropped off a cliff dipping to $260 but spiking after the turn of the year as the Fed swiveled on a dime to save the equity market from implosion.

Let’s make no bones about it, the long-term narrative for Netflix is intact as it’s ever been.

The company simply makes a great product, period, and systematically taps endless demand.

What many cable companies don’t understand is that you cannot make a high-quality film product that wedges in annoying commercials and equally as obnoxious, dictate the window of time in which they should watch the content.

Optionality is value and Netflix has this spot on.

I know many Millennial consumers that would rather jump off a building than subject themselves to commercials.

These factors erode the quality of the product just as if an employer would dictate to one of his or her employees that wanted to take a vacation to Africa.

But the vacation to Africa would have some strings attached.

He or she would only be able to visit at the height of summer in 120-degree Fahrenheit weather while every activity he or she chose to do, would be pre-empted by numerous advertisements that he or she must be shown.

Consumers don’t need these sideshows anymore; the world has developed away from these models and corporates have lost this control.

The loss of corporate control of the consumers is because the internet gives consumers millions of different options at the tip of their fingers.

Tapping into the optionality and the habits that revolve around it is paramount to corporate America.

This is the same reason why big box food companies like Kraft Heinz (KHC) is getting smacked around, consumers have better options and are more aware of them because of technology.

Another example of corporate miscalculation comes in the form of supply chains being redirected from China to South East Asia.

It was clear as day that during my time in China that companies were making a terrible mistake going into China in the first place.

This shows how many corporates are dragged down by a lack of vision and do an awful job of anticipating paradigm shifts that are becoming more common because of the accelerating rate of change of the corporate climate, weather, technology, rule of law, and human migration.

Netflix is effectively blocked from China and China has its own Netflix called iQIYI (IQ), they had no chance from the beginning like Google, Amazon, Facebook, and the many other American tech firms.

Netflix’s business model now has scale working for them and growth numbers will be the main recipients going forward if they focus on high quality content.

That means expect high pay packages to the best media talent in the world.

They can afford to pay a tier 1 actor $50 million per movie because the data buttresses this strategy.

At the same time, Netflix is crushing competition by hoarding the talent with extraordinary pay packages while allowing these highly paid specialists 100% creative control over what they do.

Who would want to work for a company that paid more than double and whose management gave them free reign on creative decisions?

Sounds like an artist’s dream and it’s exactly that for actors like Will Smith who have signed onto Netflix’s project.

I would even suggest that Netflix needs to overpay actors just for the reason of taking them off the market for competitors.

This truly is the lucrative golden age for actors, producers, and directors who are the top 1% of their craft, but for everyone else, it’s a hard slog.

This usually means becoming a tier 1 actor before the migration to online streaming happened.

The picture I am painting is that Netflix’s success and future prospects aren’t about Disney or other competitors, but entirely about them.

He who has the most chips at the table with the best cards is in best position to win and the same goes for Netflix.

The rest of the bunch like Apple (AAPL) and Disney who are late to the party will be feeding off the rest of what Netflix cannot exploit and that’s the best-case scenario.

Disney should be able to have moderate success with its array of great movie, television, and sports content.

I’d be surprised if Disney failed because they possess the ingredients to concoct a delicious cocktail.  

Apple has a harder proposition because of the lack of entertainment value in their content. They are still tied to the hardware sales and much of the service sales come from their app store and servicing the hardware.

But Apple does have money, and a lot of it to throw at the problem, but I don’t believe CEO of Apple Tim Cook is the right man to navigate through the travails of the online content world. He’s an operations guy and has never proved anything more than that.

Netflix still has substantial opportunity to grow its brand and the runway is long.

The demand for watching great original movies and television programs without commercials whenever consumers want is still in the first innings.

Even though Disney will remove some non-original content from Netflix’s platform, the content spend on a massive pipeline of new projects will more than fill the void left by Disney’s content.

In fact, Netflix should thank Disney for all those years that Disney allowed them to build their brand through 3rd party premium content like the television program Friends.

I believe Netflix does not need 3rd party content anymore, that is how much Netflix has bolted ahead in the past few years.

The company has introduced price hikes with its 4K premium package going from $14 to $16 per month.

But Netflix is still underpricing itself to the consumer to grab market share, and there is still pricing headway in the future if the company wants it.

In the coming months, Netflix plans to offer more detailed reporting on its metrics and the transparency will give investors even more insight into why this company is brilliant.

I believe the numbers will show that Netflix is absolutely killing it.

As for the trading, Netflix has settled in a range of $320 to $380 and any dips to the $340 range should be quite appetizing.

Add incrementally and use any large dip to drop your cost basis.

Stand aside if you cannot handle heightened volatility.

 

July 3, 2019

Mad Hedge Technology Letter
July 3, 2019
Fiat Lux

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