Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 26Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: There’s been a moderation of new coronavirus cases in China. Is this what the market needs to find a bottom?
A: Absolutely it is; of course, the next risk is that cases keep increasing overseas. The final bottom will come when overseas cases start to disappear, and that could be a month or two off.
Q: How low will interest rates go after the coronavirus?
A: Well, interest rates already hit new all-time lows before the virus became a stock market problem. The virus is just giving it a turbocharger. Our initial target of 1.32% for the ten-year US Treasury bond was surpassed yesterday, and we think it could eventually hit 1.00% this year.
Q: What is the best way to know when to buy the dip?
A: When the Volatility Index (VIX) starts to drop. If you can get the volatility index down to the mid-teens and stay there, then the market will stabilize and start to rise fairly sharply. A lot of the really high-quality stocks in the market, like United Airlines (UAL), Walt Disney (DIS), Apple (AAPL) and Amazon (AMZN), have really been crushed by this selloff. So those are the names people are going to look at for quality at a discount. That’s going to be your new investment theme, buying quality at a discount.
Q: Do recent events mean that Boeing (BA) is headed down to 200?
A: I wouldn't say $200, but $280 is certainly doable. And if you get to $280, then the $240/$250 call spread all of a sudden looks incredibly attractive.
Q: What does a Bernie Sanders presidency mean for the market?
A: Well, if he became president, we could be looking at like a 50-80% selloff—at least a repeat of the ‘09 crash. However, I doubt he will get elected, or if elected, he won’t have control of congress, so nothing substantial will get done.
Q: Is this the beginning of Chinese (FXI) bank failures that will cause an economic crisis in mainland China?
A: It could be, but the actual fact is that the Chinese government is doing everything they can to rescue troubled banks and companies of all types with short term emergency loans. It’s part of their QE emergency rescue package.
Q: Can you explain what lower energy prices mean for the global economy?
A: Well, if you’re an oil consumer (USO), it’s fantastic news because the price of gas is going down. If you’re an oil producer (XLE), like for people in the Middle East, Texas, Louisiana, Oklahoma, and North Dakota, it’s terrible news. And if you’re involved anywhere in the oil industry, or own energy stocks or MLPs, you’re looking at something like another great recession. I have been hugely negative on energy for years. I’ve seen telling people to sell short coal (KOL). It’s having a “going out of business” sale.
Q: Should I aggressively short Tesla (TSLA) here? Surely, they couldn’t go up anymore.
A: Actually, they could go up a lot more. I would just stay away from Tesla and watch in amazement—there’s no play here, long or short. It suffices to say that Tesla stock has generated the biggest short-selling losses in market history. I think we’re up to about $15 billion now in short losses. Much smarter people than us have lost fortunes trying in that game.
Q: Was that an Amazon trade or a Google trade?
A: I sent out both Amazon and an Apple trade alert this morning. You should have separate trade alerts for each one.
Q: Are chips a long term buy at today’s level?
A: Yes, but companies like NVIDIA (NVDA), Micron Technology (MU), and Advanced Micro Devices (AMD) may be better long-term buys if you wait a couple of weeks and we test the new lows that we’ve been talking about. Chips are the canary in the coal mine for the global economy, and we have not gotten an all-clear on the sector yet. If you’re really anxious to get into the sector, buy a half of a position here and another half 10% down, which might be later this week.
Q: When will Foxconn reopen, the big iPhone factory in China?
A: Probably in the next week or so. Workers are steadily moving back; some factories are saying they have anywhere from 60-80% of workers returning, so that’s positive news.
Q: Are bank stocks a sell because of lower interest rates?
A: Yes, absolutely. If you think the 10-year treasury is running to a 1.00% yield as I do, the banks will get absolutely slaughtered, and we hate the sector anyway on a long-term basis.
Q: What about future Fed rate cuts?
A: Futures markets are now pricing in possibly three more rate cuts this year after discounting no more rate cuts only a few weeks ago. So yes, we could get more interest rates. I think the government is going to pull all the stops out here to head off a corona-induced recession.
Q: Once your options expire, is it still affected by after-hours trading?
A: If you read the fine print on an options contract, they don’t actually expire until midnight on a Saturday night after options expiration day, even though the stock market stops trading on a Friday. I’ve never heard of a Saturday exercise, but you may have to get a batch of lawyers involved if you ever try that.
Q: What’s the worst-case scenario for this correction?
A: Everything goes down to their 200-day moving averages, including Indexes and individual stocks. You’re talking about Apple dropping to $243 and Microsoft (MSFT) to $144, and NASDAQ (QQQ) to 8,387. That could tale the Dow Average (INDU) to maybe 24,000, giving up all the 2019 gains.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Just as every cloud has a silver lining, every stock market crash offers generational opportunities.
In a month or two, there will be spectacular trades to be had with LEAPS. What are LEAPS, you may ask?
This is the best strategy with which to cash in on the gigantic market swoons, which have become a regular feature of our markets.
Since the advent of the recent incredible market volatility, I have been asked one question.
What do you think about LEAPS?
LEAPS, or Long Term Equity AnticiPation Securities, is just a fancy name for a stock option spread with a maturity of more than one year.
You execute orders for these securities on your options online trading platform, pay options commissions, and endure option like volatility.
Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying years’ worth of stock gains for a fraction of the price.
While these are highly leveraged instruments, you can’t lose any more money than you put into them. Your risk is well defined.
And there are many companies in the market where LEAPs are a very good idea, especially on those gut-wrenching 1,000-point down days.
Interested?
Currently, LEAPS are listed all the way out until January 2022, some 695 days away.
However, the further expiration dates will have far less liquidity than near month options, so they are not a great short-term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.
These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.
Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.
Like all options contracts, a LEAP gives its owner the right to "exercise" the option to buy or sell 100 shares of stock at a set price for a given time.
LEAPS have been around since 1990, and traded on the Chicago Board Options Exchange (CBOE).
To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.
If a LEAP expires "out-of-the-money" – when exercising, you can lose all the money that was spent on the premium to buy it. There's no toughing it out waiting for a recovery as with actual shares of stock. Poof, and your money is gone.
LEAPS are also offered on exchange-traded funds (ETFs) that track indices like the Standard & Poor's 500 index (SPY) and the Dow Jones Industrial Average (INDU), so you could bet on up or down moves of the broad market.
Not all stocks have options, and not all stocks with ordinary options also offer LEAPS.
Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or "writer," of the LEAP contract until the LEAP owner exercises.
Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.
They offer more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.
And for a moderate increase in risk, they present outsized profit opportunities.
For the right investor, they are the ideal instrument.
Let me go through some examples to show you their inner beauty.
By now, you should all know what vertical bull call spreads are. If you don’t, then please click their link for a quickie video tutorial. You must be logged in to your account.
Let’s go back to February 9, 2018 when the Dow Average plunged to its 23,800 low for the year. I then begged you to buy the Apple (AAPL) June, 2018 $130-$140 call spread at $8.10, which most of you did. A month later, that position is worth $9.40, up some 16.04%. Not bad.
Now let’s say that instead buying a spread four months out, you went for the full year and three months, to June 2019.
That identical (AAPL) $130-$140 would have cost $5.50 on February 9. The spread would be worth $9.40 today, up 70.90%, and worth $10 on June 21, 2019, up 81.81%.
So, by holding a 15-month to expiration position for only a month, you get to collect 86.67% of the maximum potential profit of the position.
So, now you know why we leap into LEAPS.
When the meltdown comes, and that could be as soon as today, use this strategy to jump into longer-term positions in the names we have been recommending and you should be able to retire early.
What’s out there today? Take a look at Boeing (BA), one of the most undervalued companies in the market, thanks to their 737 MAX woes.
Today, (BA) shares were trading at a lowly $305. Let say that Boeing shares recover to $350 by the end of 2020. You can buy a January 2021 $340-$350 vertical bull call spread for $3.00. If Boeing makes it back up to $350 by the January 15, 2021 option expiration, the LEAP will expire worth $10, an increase of 233%.
It gets better. You can buy a (BA) January 2022 $370-$380 call spread for $2.15. If Boeing recovers to $380 by the January 21, 2022 expiration it will expire worth $10, giving you a gain of 365%!
What if you think that Boeing is overdue for a monster rally back to its old all-time high of $450?
You can buy a (BA) January 2022 $420-$430 calls spread for $0.90. If Boeing makes it all the way back to $430 by the January 21, 2022 expiration, it will expire worth $10, giving you a gain of 1,011%! Caution: If the shares only make it back up to $429, the position becomes worthless.
Now you know why I like LEAPS so much. Play around with the names and the numbers and I’m sure you will find something you like. But remember one thing. Buying LEAPS is only a trade to consider at long time market bottoms, not tops!
https://www.madhedgefundtrader.com/wp-content/uploads/2020/02/leap-of-faith.jpg400400Arthur Henryhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngArthur Henry2020-02-27 08:04:432020-05-12 22:29:43Get Ready to Take a Leap Back into Leaps
After weeks of turning a blind eye, poo-pooing, and wishfully ignoring the global Coronavirus pandemic, traders are finally getting a wake-up call.
It turns out that the prospect of a substantial portion of the world’s population dying over the next few months cannot be offset by quantitative easing after all.
At least for the short term.
This weekend we learned that all Asian cruises have been cancelled. More factories in South Korea have been shut down for the lack of Chinese parts. Technology conferences in San Francisco have been cancelled. Some 80% of all Chinese flights are grounded.
GM assembly lines in Michigan are slowing, both from missing parts and customers. And we have just learned that a section of Italy near Milan has been quarantined, thanks to a major outbreak there.
I learned the true severity of Corona a week ago when I ended up sitting next to a research doctor who worked for San Francisco-based Gilead Sciences (GILD) on a first-class flight from Melbourne, Australia to San Francisco.
He was returning from Wuhan, China, the epicenter of the virus. Since all flights from China to the US are now banned, he had to route his return home via Australia.
What he told me was alarming.
The Chinese are wildly understating the spread of the Coronavirus by perhaps 90% to minimize embarrassment to the government, which kept the outbreak secret for a full six months.
Bodies are piling up outside of hospitals faster than they can be buried. Police are going door to door arresting victims and placing them in gigantic quarantine centers. Every covered public space in the city is filled with beds and the roads are empty. Smaller cities and villages have set up barriers to bar outsiders.
He expected it would be many months before the pandemic peaked. It won’t end until the number of deaths hits the tens of thousands in China and at least the hundreds in the US.
The frightening close in the S&P 500 (SPY) on Friday and the horrific trading in futures overnight in Asia suggest that the worst is yet to come.
Since the beginning of 2019, we have been limited to mere 5% downturns in the major indexes, creating a parabola of euphoric share prices. This time, we may not get off so lightly.
There is no doubt that Corona will take a bite out of growth this year. The question is how much. Central banks could well dip in for yet another round of QE to save the day.
The bigger question for you and me is whether investors are willing to look through to the other side of the disease and use this dip as an opportunity to buy. If they are, we are looking another 5% draw down. If they aren’t, then we are looking for 10%, or even more.
Then there is the worst-case scenario. If Corona reaches the proportion of the 1918 Spanish flu pandemic where 5% of the world’s population died, then we are looking at a global depression and an 80% stock market crash.
Hopefully, modern science, antibiotics, and rapid response research teams will prevent that from happening. We already have the Corona DNA sequence and several vaccines are already in testing. In 1918, they didn’t even know what DNA was.
The disease could well be peaking now as the course of the last surprise epidemic, that of Ebola in 2014, suggests (see chart below). Until then, we shall just have to hope and pray.
In addition to praying, I’ll be raising cash and adding hedges just in case providence is out of range.
30-Year Treasury Bond Yields (TLT) hit all-time lows following on from the logic above, calling for a melt-up of all asset prices. Collapsing interest rates doesn’t signal an impending recession but a hyper-acceleration of technology wiping out jobs by the millions and capping any wage growth. I’m looking for 1.00% on the ten-year. Money will remain free as far as the eye can see.
Apple tossed Q2 guidance, giving up most Chinese sales because of the big Coronavirus shutdown. The stores have been closed. The stock dives overnight, down $10. Shutdown of its main production factory at Foxconn didn’t help either. Nintendo is also struggling with production of its wildly popular Switch game. When you lose the leader, watch out for the rest of the market.
Massive Chinese Stimulus should head off any sharp downturn in the economy. Will an interest rate cut and a huge dose of QE be enough to offset the deleterious effects of the Coronavirus? Ask me again in another month.
Expats fled Asia and are not returning until the epidemic is over. My plane on the way home was full of Americans taking families home to avoid the plague. It’s yet another drag on the global economy.
Housing Starts plunged 3.6% in January, while permits hit a 13-year high. It’s all a giant interest rate play fueled by massive liquidity.
US Existing Home Sales faded in January, down 1.3%, to a seasonally adjusted rate of 5.46 million units. Inventories are down to an incredible 3.1 months, near an all-time low. I guess consumers don’t want to rush out and buy a new home if they are about to die of a foreign virus.
The Fed Minutes came out and it looked like the central bank wanted to keep American interest rates unchanged. The January meeting showed a stronger forecast for the economy, so no chance of another interest rate cut here. Even last month, Coronavirus was becoming an issue.
Leading Economic Indicators soared, up 0.8%, versus 0.4%. It’s the highest reading in 2 ½ years. If Coronavirus is going to hurt our economy, it’s not evident in the numbers yet.
The Philly Fed was also red hot, at 36.7. It’s another non-confirmation of the Corona threat.
Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to maintain new all-time highs. I used the steadily falling prices and sharply rising volatility Index of last week to scale into an aggressive long position from 100% cash.
I bought deep in-the-money call spreads in FANG stocks like (AAPL) and (MSFT) I also picked up additional positions in shares most affected by the Coronavirus, like Carnival Cruise Lines (CCL), United Airlines (UAL), and Wynn Resorts (WYNN), which are all down 25% from recent peaks.
My Global Trading Dispatch performance rose to a new all-time high at +359.73% for the past ten years. February stands at +0.69%. My trailing one-year return is stable at 46.61%. My ten-year average annualized profit ground back up to +35.38%.
All eyes will be focused on the Coronavirus still, with deaths over 2,000. The weekly economic data are virtually irrelevant now. However, some important housing numbers will be released.
On Monday, February 24 at 8:30 AM, the Dallas Fed Manufacturing Index is published.
On Tuesday, February 25 at 8:30 AM, the S&P Case Shiller National Home Price Index for December is out .
On Wednesday, February 26, at 8:00 AM, January New Home Sales are released.
On Thursday, February 27 at 8:30 AM, the government announced the second look at Q4 GDP. Weekly Jobless Claims are also out at 8:30.
On Friday, February 28 at 9:45 AM, the Chicago Purchasing Manager Index is printed.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, we have just suffered the driest February on record here in California, so I’ll be reorganizing my spring travel plans. Out goes the skiing, in comes the beach trips. Such is life in a warming world.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2020/02/viruses-compared.png585899Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-02-24 08:02:292020-05-11 14:24:27The Market Outlook for the Week Ahead, or The Wake-Up Call
Not only have Facebook (FB), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL) been at the core of our investment performance for the past decade years, we also gobble up their products and services like kids eating their candy stash the day after Halloween.
Three of the FANGs have already won the race to become the first $1 trillion in history, Apple, Amazon, and Microsoft.
In fact, the FANGs are so popular that we need more of them, a lot more. So how do we find a new FANG?
Here is where it gets complicated. None of the four have perfect business models. All excel in many things but are deficient at others.
So, there are at least four different answers as to what makes a FANG. A more accurate answer would probably be 4 squared, or four to the tenth power.
I will list the eight crucial elements that make a FANG.
1) Product Differentiation
In medieval times, location was the most important determinant of business success. If you owned Ye Olde Shoppe at the foot of London Bridge, you prospered.
Then, great distribution was crucial. This occurred during the 19th century when the railroads ran the economy.
Products followed with the automobile boom of the 20th century, when those who dreamed up 18-inch tailfins dominated. This strategy was applied to all consumer products.
The Financial age came next, when cheap money was used to assemble massive conglomerates that was the primary determinant of success.
The eighties and nineties spawned the era of global brands, be it Coca Cola, MacDonald’s, Lexus, or Gucci.
Today, the global economy is ruled by those who can provide the best services. Facebook offers you personal access to a network of 1.5 billion. Apple will sell you a phone that can perform a magical array of tricks.
Netflix will stream any video content imaginable with lightning speed. Alphabet will deliver you any piece of information you want as fast as you can type, but charges advertisers hundreds of billions of dollars to get in your way.
This has created what I call an “Apple” effect. It stampedes buyers to pay the highest premiums for the best products, assuring global dominance.
While Apple accounts for less than 10% of the smart phone market, it captures a stunning 92% of the net profits. Everyone else is just an “also ran.”
Instead of driving my car into a dingy dealership every few months to get ripped off for a tune up, Tesla (TSLA) does it remotely, online, while I sleep, for free.
Unlike battling for a smelly New York taxi cab in a snow storm, a smiling Uber driver will show up instantly, know where to go, automatically bill me at a discount price, and even give me restaurant recommendations in Kabul.
And you all know what Amazon can do. It beats the hell out of looking for a parking space at a mall these days, only to be told they don’t have your size (48 XLT).
2. Visionary Capital
If you have a great vision, you can get unlimited financing free from investors anywhere. That puts those who must pay for expensive external financing for growth at a huge disadvantage.
Have a great vision, and the world is your oyster.
Elon Musk figured this out early with Tesla. By promising a “carbon-free economy,” he has been able to raise tens of billions of equity capital even though his firm has never made a real profit.
Alphabet is “organizing the world’s information”, while Facebook is “connecting the world.”
Chinese Internet giant Alibaba (BABA) invented a holiday from scratch, “Singles Day,” November 11, which has quickly become the most feverish shopping day in history. In 2019, they booked an unbelievable $30.8 billion in sales in a single 24 hours period, up 27% from the previous year.
And you know the great thing about visions? Not only do venture capitalists and consumers love them, so do stock investors.
3) Global Reach
You have to go global or be gone. A company with 7 billion customers will beat one with only 330 million all day long.
Go global, and economies of scale kick in enormously. This is only possible if you digitize everything from the point of sale to the senior management. Some two-thirds of Facebook users are outside the US, although half its profits are homegrown.
By the way, the Mad Hedge Fund Trader is global, with readers in 135 countries. Our marginal cost of production is zero, and the entire firm is run off my American Express card. It’s a great business model. And boy, do I get a ton of frequent flier points! Whenever I board Virgin Atlantic’s nonstop from San Francisco to London, the entire crew stands up to salute.
4) Likeability
Who doesn’t like Mark Zuckerberg, with his ever-present hoodies, skinny jeans, and self-effacing demeanor. And who did Facebook send to Washington to testify about internet regulation but the attractive, razor-sharp, and witty Sheryl Sandberg? The senators ate out of her hand.
Bill Gates and Steve Ballmer? Not so likable. Their arrogance invited a ten-year antitrust suit against Microsoft (MSFT) from the Justice Department which half the legal profession made a living off of.
And here’s the thing. If people like you, so will consumers, regulators, and yes, even equity investors. It makes a big difference to the bottom line and your investment performance.
5) Vertical Integration
Crucial to the success of the FANGs is their complete control of the customer experience through vertical integration.
When FANGs don’t manufacture their own products, as Apple does, they source them, rebrand them, and sell them as their own, like Amazon.
The return on investment for advertising is plummeting. Just ask the National Football League. So, it has become essential for companies to keep a death grip on the customer the second they enter your site.
Some, like Amazon again, will keep chasing you long after you have left their sites with special offers and alternative products. Even if you change computers they will hunt you down.
One of my teenaged daughters used my computer to buy a swimsuit last summer, and let me tell you, booting up in the morning has been a real joy ever since.
This was the genius of the Apple store network. Buy one Apple product and they own you for life, like an indentured servant. They all integrate and talk to each other, a huge advantage for a small business owner. And they are cool.
No pimple-faced geeks wearing horn-rimmed glasses here. Get your iPhone fixed and you don’t talk to a technician, but a “genius.” It’s all about control.
Expect other strong brands to open their own store chains soon.
6) Artificial Intelligence
There is probably no more commonly known but least understood term in technology today. It’s like counting the number of people who have finished Dr. Stephen Hawking’s “A Brief History of Time” (I have).
A trillion-dollar company absolutely must be able to learn from human data input and then use algorithms to analyze it. Data has become the oxygen of the modern economy.
The company then use other algos to predict what you’re most likely buying next and then thrust it in front of your face screaming at the top of its lungs.
This has been evolving for decades.
First, there was demographic targeting. White suburban middle-class guys have all got to like Budweiser, right?
This turned into social targeting. If two friends “liked” the same brand, regardless of their demographics, they should be targeted by same advertisers.
Now we live in the age of behavioral targeting. There is no better predictor of future purchases than current activities. So, if I buy a plane ticket to Paris, offerings of Paris guidebooks, tours, French cookbooks, French dating services, and even seller of discount black berets suddenly start coming out of the woodwork.
It would be a vast understatement to say that behavioral targeting is the most successful marketing strategy ever invented. So, guess what? We’re going to get a lot more of it.
As depressing as this may sound, the number one goal of almost all new technological advancements these days is to get you to buy more stuff.
Better to use the public computer at the library to buy your copy of “50 Shades of Gray.”
7) Accelerant
If you want to throw gasoline on the growth of a company, you absolutely have to have the best people to do it. The companies with the smartest staff can suck in free capital, invent faster, develop speedier services, and always be ahead of the curve when compared to the competition.
This has led to enormous disparities in income. Companies will pay anything for winners, but virtually nothing for losers.
I’ll never forget the first day I walked on to the trading floor at Morgan Stanley (MS). I am 6’4” and am used to towering over those around me. But at Morgan, almost all the salesmen were my height or a few inches shorter.
The company specifically selected these people because they delivered better sales records. Height is intimidating, especially to short customers.
And that’s what the FANGs have, the programming equivalents of a crack all-6’4” sales team.
A few years ago, my son got a job as the head of International SEO at Google. He was rare in that he spoke fluent Japanese and carried three passports, US, British, and Japanese (born in London with a Japanese mom and American dad).
However, when he met his team, they all spoke multiple languages, were binational, and were valedictorians, National Merit Scholars, and Eagle Scouts to boot!
This is why immigration is such a hot button issue in Silicon Valley these days. If you can’t get a work visa for a graduating PhD in Computer Science from Stanford, he’ll just go back to China or India to start a local competitor that may someday eat your lunch.
By the way, if you get a FANG on your resume, even for a short period, you are set for life. Oh, and by the way, Apple gets 100,000 resumes a month!
8) Geography
It all about location, location, location. It’s no accident that Silicon Valley took root near two world class universities, the University of California at Berkeley (my alma mater), and the godless heathens at Stanford across the bay.
When the pioneers moved west in covered wagons in 1849, they came to a fork in the road. The god fearing families went right to the verdant farmland of Oregon, while young men cashing in on the latest get-rich-quick scheme chose left for the gold fields of California. Nothing has changed since.
Cal in particular was the recipient of massive government funding for the Manhattan Project that built the first atomic bomb during WWII. The tailwind lingers to this day. The world’s first cyclotron still occupies a local roundabout.
Universities provide the raw materials essential to create hot house local economies like the San Francisco Bay Area. And as much as every region in the US or country in the world would like to do this, none have been able to.
There is only one place in the world were a company can hire 1,000 engineers from scratch on short notice, and that is the Bay Area.
Also, innovation is city centered. Some two-thirds of future GDP growth will emanate from cities.
So, if you want to move your career forward, you better count on spending some serious time in Silicon Valley, New York, London, and Tokyo.
I’ve done all four and it paid handsomely.
So there you have it. Now we know what makes a FANG. I’ll be addressing who the most likely FANG candidates are in a future letter.
I want to thank my friend, Scott Galloway of New York University’s Stern School of Business for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/02/john-laptop.jpg388335Arthur Henryhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngArthur Henry2020-02-20 04:02:462020-05-11 14:24:07Finding a New FANG
The coronavirus hammer finally came down and hit one of the dominant soldiers of big tech.
Apple (AAPL) led morning headlines nationwide by slashing quarterly revenue guidance stemming from production delays and weak demand in China.
Deleting the China demand for new iPhones is enough for the company to signal a looming revenue miss and rightly so, coronavirus has been 24-hour news for the past 2 months on the Asian continent.
As we speak, the cruise liner named the Diamond Princess is parked outside the port of Yokohama with the victims of infected rising by the day.
The optics are ugly, and China’s cover-up of the spreading went awfully awry and now pandora’s box is open.
Naturally, tech stocks can expect a few percentage points shaved off of this year’s annual growth targets and short-term sluggishness in shares exposed to China revenue.
What are the ramifications?
Telecom companies are in the incubation period of building out 5G wireless networks.
Naturally, tech shares will receive a bounce as network deployment gains traction as management commentary, during company earnings calls, on 5G business heats up.
However, the Mobile World Congress was cancelled by organizers stealing the chance for 5G stocks to hype up their position in 5G.
It is almost guaranteed at this point that China coronavirus will slow down the schedule for 5G wireless network buildouts.
Think about this, SARS lasted roughly half a year during 2002-2003, and the coronavirus appears to be worse than that.
Chinese telcoms will need to delay 5G and related equipment along with business that has around 150 million Chinese ensnared by the domestic quarantine.
Apple’s 5G iPhones in late 2020 could be delayed if there is no meaningful breakthrough in the contagion of the coronavirus and its ill effects on global business.
Apple stock appreciated on the hope that 5G iPhones aim to deliver the first meaningful consumer upgrade cycle in several years with a hefty price tag of $1,250.
This next generation iPhone could get pushed back to 2021 as Apple’s supply chain has been put on ice in mainland China.
If Verizon Communications (VZ), AT&T (T), T-Mobile US (TMUS) and Sprint (S) desire to aggressively expand their 5G networks, they might be in for a rude awakening because semiconductor companies might be stretched to limit and cannot provide the right components with supply chains pressured everywhere.
The truth is that supply chains are impacting diverse and interconnected sectors of the electronics industry.
And the epidemic, arriving at dawn of 5G's mainstream deployment phase, is guaranteed to disrupt the progress of the next-generation wireless standard, as the crisis slows the production of key smartphone components, including displays and semiconductors.
Chip companies and their shares have naturally been rocked by the recent news and they aren’t the only ones.
Expedia (EXPE), the online travel company, revealed it will avoid providing a full-year forecast as the online travel services company reevaluates the impact of the coronavirus outbreak on its operations.
Investors can imagine that on mainland China, the situation is grim exerting a fundamental impact on the country’s consumers and merchants and will slice off revenue growth in the current quarter.
Alibaba (BABA), the Amazon of China, told investors that the virus is undermining production and output in the economy because many workers are stuck at home.
The virus has also changed the commerce patterns of consumers by pulling back on discretionary spending, including travel and restaurants.
The Chinese e-commerce giant’s revenue surged year-over-year by an impressive 38% to 161.5 billion yuan ($23.1 billion), while net income rose 58% to 52.3 billion yuan, but that could symbolize the high-water mark.
Chief Executive Officer Daniel Zhang and Chief Financial Officer Maggie Wu were explicit in mentioning that risks from the pandemic could deaden a piece of revenue moving forward and they weren’t shy about stating this.
Sound bites such as “overall revenue will be negatively impacted,” and expecting growth to be “significantly” negative is quite black and white.
China is almost certain to print weak GDP growth numbers because of cratering imports and a big drop in demand.
Echoing Alibaba’s weakness was network infrastructure company Cisco (CSCO) with a revenue shortfall of 3.5% year-over-year as major product categories like Infrastructure Platforms and Applications were hit.
Cisco must find new cycles in core activities to regain any momentum and chip companies must do the same as the administration turns the screws on Huawei and injects more barriers to U.S. chip companies selling abroad.
This adds to the broader risks of elevated corporate debt and the upcoming U.S. election where tech management is nervous that a new President could throw big tech under the bus.
The coronavirus pours fuel on the flames.
The silver lining is the blows to these companies are softened by the ironic fact that big tech has become the safety trade to the coronavirus and even if 5G is delayed, chip stocks will eventually benefit from a fresh wave of revenue drivers when the 5G network is finally deployed.
However, it is way too early to announce the death of big tech, there are far too many secular tailwinds driving these companies.
The tech bull market is still intact and there will be opportunity to buy.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/02/coronavirus-1.png400800Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-02-19 10:02:122020-05-11 13:12:59Buy the Corona Dip
Apple CEO Tim Cook pulled off a quarter to remember.
And yes, I've been hypercritical of his lack of innovation, but I can't question the way he’s insulated the company from being exposed to softness in mainland China.
Analysts expected $88 billion in revenue and Apple easily surpassed this number by posting $91 billion.
When you look under the surface, there are usually some chinks in the armor.
But this time around Apple's quarter was practically flawless albeit with some frosty guidance.
It's no secret that the quality of a Chinese smartphone has picked up and now rivals some of Apple's best products.
However, Apple turned a weakness into a strength and sales of iPhones was one of the highlights of an outstanding quarter.
In fact, it was the iPhone 11 that carried the load this time.
In total, iPhone Revenue rose 8% to almost $56 billion and they shipped 72.9 million units.
The outperformance doesn't just end there.
Wearables have become a meaningful revenue driver in itself.
Specifically, ear buds and the Apple watch have captivated Apple customers who are scooping up these products in droves.
In the prior quarter, 75% of people who bought the Apple watch were first time buyers.
This added up to wearables clocking in $7.3 billion in revenue this past quarter.
Apple’s outperformance dovetails nicely with my overarching theme of the FANG group plus Microsoft separating themselves from the other tech companies in 2020.
The network effect that these companies possess is unrivaled and the longer they stay in business, the stronger these effects seep in.
If there was a negative part of the quarter, Tim Cook failed to delve into the new Apple streaming product and avoided giving too much detail.
Fortunately, Apple has not bet the ranch on streaming and have stuck to what they know best.
Ultimately, Cook struck a lukewarm tone, especially with the spread of China’s coronavirus threatening to shut down production operations for several manufacturers.
The company has restricted employee travel and shut one store due to the outbreak.
Looking forward, management said “there will definitely be an impact on China in terms of consumption.”
Apple is slated to release its first 5G phone later this year which has been the catalyst for the price appreciation in shares.
Apple continues to be a multiprong revenue machine and any dip should be bought.
This is the type of company that should be part of any multi-asset portfolio.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-31 04:02:322020-05-11 13:09:32Apple Outshines the Rest
(WEDNESDAY, FEBRUARY 5 MELBOURNE, AUSTRALIA STRATEGY LUNCHEON)
(CAPTURING SOME YIELD WITH CELL PHONE REITS),
(CCI), (AMT), (SBAC),
(JNK), (SPG), (AMLP), (AAPL), (VZ), (T), (TMUS), (S)
I am constantly bombarded with requests for high-yield, low-risk investments in this ultra-low interest rates world.
While high-yield energy Master Limited Partnerships LIKE (AMLP) can offer double-digit returns, they carry immense risks. After all, if the prices of oil drop to $5-$10 a barrel, replaced by alternatives as I eventually expect, all of these instruments will get wiped out.
You can earn 5%-8% from equity-linked junk bonds. However, their fates are tied to the future of the stock market at a 20-year valuation high against flat earnings.
You might then migrate to Real Estate Investment Trusts (REITs) like Simon Property Group (SPG), which acts as a pass-through vehicle for investments in a variety of property investments. However, many of these are tied to shopping malls and the retail industry, the black hole of investment today.
So where is the yield-hungry investor to go?
You may have heard about something called 5G. This refers to the rollout of fifth-generation wireless technology that will increase smartphone capabilities tenfold. Whole new technologies, like autonomous driving and artificial intelligence, will get a huge boost from the advent of 5G. Apple (AAPL) will launch its own 5G phone in September.
5G, like all cell phone transmissions, rely on 50-200-foot steel towers strategically placed throughout the country, frequently on mountain peaks or the tops of buildings. With demand from the big phone carriers soaring, there is a construction boom underway in cell phone towers. There just so happens to be a class of REITs that specializes in investment in this sector.
Cells Phone REITs constitute a $125 billion market and make up 10% of the REIT indexes. They own 50%-80% of all investment-grade towers. They are all benefiting from a massive upgrade cycle to accommodate the 5G rollout. These REITs own or lease the land under the cell towers and then lease them to the phone companies, like Verizon (VZ), AT&T (T), T-Mobile (TMUS), and Sprint (S) for ten years with 3% annual escalation contracts.
American Tower (AMT) is far and away the largest such REIT, with 170,000 towers, has provided an average annual return over the past ten years, and offers a fairly safe 1.65% yield. They are currently expanding in Africa. Even during the 2008 crash, (AMT) still delivered an 8% earnings growth.
SBA Communications (SBAC) is the runt of the sector with only 30,000 towers. However, it has a big presence in Central and South America and is seeing earnings grow at a prolific 80% annual rate. (SBAC) is offering a 1.48% yield at today’s prices.
Crown Castle International (CCI) is in the middle with 40,000 large towers and 65,000 small ones. 5G signals travel only a 1,000 meters, compared to several miles for 4G, requiring the construction of tens of thousands of small towers where (CCI) is best positioned. (CCI) offers a hefty 3.39% yield.
Small cell towers are roughly the size of an extra-large pizza box and will soon be found on every urban street corner in the US. AT&T (T) has estimated that there is a need for over 300,000 small cell phone towers in the US alone.
So, if you’re looking for a sea anchor for your portfolio, a low-risk, high-return investment that won’t see a lot of volatility, Cell phone REITs may be your thing. Buy (CCI) on dips.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-09 07:02:492020-01-09 06:52:59Capturing Some Yield with Cell Phone REITs
Tech shares are pricey, but that doesn’t mean they can’t get more expensive.
Strength often begets strength.
Let’s take for instance Apple (AAPL) – it delivered investors 86% in 2019 and that was their best performance in the past 10 years.
This was on the heels of a tumultuous 2018 where Apple sank 6%.
Many of the best of brightest of the tech industry beat the S&P last year, which itself gained 29%.
And as Apple leapfrogged into the software as a service business, they find themselves shunning China hardware revenue that got themselves into the 2018 mess.
Apple is betting that the confines of stateside consumer culture will offer greener pastures.
Overall, the market is pricing in a lukewarm 2020 for tech earnings boding well for the elite tech stocks that celebrated touchdown after touchdown in 2019.
Surpassing low expectations could be another rewind back to Q4 2019 which was a time that offered tech shares a platform to surge to all-time highs.
The worrying development for 2020 is that poorer-rated tech corporations won’t have the same access to cheap debt as they did in 2018 or even 2019.
The chapter of loose credit is about to close stymying loss-making tech companies who thought they could use subsidies to achieve success.
The prices of CCC-rated European bonds have declined immensely in the past year showing investors' lack of appetite for the riskier part of the corporate debt market.
Venture capitalists aren’t going to foot the bill for the next big thing in Silicon Valley at this point in the economic cycle unless the unit economics are too good to be true.
The story of 2020 will be the intensification between the haves and have nots in tech.
This is the case of the market putting a premium on time-honored tech brands and bulletproof balance sheets that they have cultivated.
On a broader level, the Fed who has presided over a $600 billion expansion in their balance sheet in the last four months offers yet another tailwind to tech shares in the short-term.
The Fed’s decision in the last few months to re-start large-scale asset purchases will help keep a foot under tech shares in early 2020 and responds like a de facto QE.
If you thought 2019 was a bad year for Uber and Lyft, then wait until this year plays itself out.
The gig economy stocks are in the direct firing line with nowhere to run and other non-sensical profit models will find it costly to search for debt alternatives in which to service their visions.
If the tech sector does become a war of attrition between the FANGs staving off one another by acquiring inorganic growth, then marginal tech players will get squeezed because they don’t have the capital bazookas to compete with the likes of Facebook (FB) and Google (GOOGL).
This is the year that we could see a slew of fringe tech companies go bust as debt markets sour on false narratives of future profits and equity markets turn against them.
The feast versus famine theme is also aligned with 5G, with many of the same cast of characters such as Apple, Alphabet posed to usurp revenue when this new technology finally becomes pervasive in consumer culture.
The Apple refresh cycle will dust off its playbook for another blockbuster rollout later this year when Apple debuts its much-awaited 5G phone.
Much of the share appreciate in Apple of late can be attributed to the anticipation of the new iPhone and the fresh infusion of revenue that branches off from it.
The applications that result from the new 5G Apple phone is seen as a luscious force multiplier to many 3rd party companies as well.
Chip stocks will be counted on as the ones lifting the tech foundations and just looking at shares in China, demonstrations of frothiness are running wild throughout their markets.
The Chinese government, to counteract the trade war, has been on a mission to flood its tech sector with unlimited capital as a catchup mechanism to overcome its inferior domestic chip industry.
Will Semiconductor, a supplier of integrated circuit products for telecommunications and electronics for cars, delivered a 390% performance in 2019 ranking it as the best performer in the Chinese stock market.
Luxshare Precision Industry and GoerTek, suppliers of consumer electronics products supplying Apple, and GigaDevice Semiconductor, producing flash chips, weren’t too shabby either each eclipsing at least 193% last year.
Even though 5G construction isn’t fully operational, I can attest that revenue creation for the companies involved are in full swing.
Investors must narrow their pickings to the biggest and financially resilient; this is not the time to expose oneself to the ugly trepidations of the mood-sensitive tech market.
For investors who can balance the delicate relationship of risk and surgical maneuvering, this year will end positive.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/01/tech-valuation.png708972Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-01-08 07:32:202020-05-11 13:07:40The Top Is Not In For Tech Stocks
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-12-30 08:04:332019-12-30 07:28:17December 30, 2019
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