Mad Hedge Technology Letter
May 17, 2021
Fiat Lux
Featured Trade:
(MULTIPLE CONTRACTION)
(QQQ), (AAPL), (GOOGL), (MSFT), (TDOC), (TSLA)
Tag Archive for: (AAPL)
High multiple tech stocks often overshoot on the way up and overshoot on the way down.
This is predominately driven by uncontrolled momentum as investors and traders resort to margin to borrow money and add leverage to positions and trends that seem to be working at the time.
Since the start of the year, technology has had to come to grips with a sudden rerating of valuations.
For example, a bellwether stock for the future success of tech, Tesla (TSLA) has corrected 20% year-to-date after more than 700% move up in 2020.
Reliable big-cap tech has been more steadfast in 2021 such as the likes of Apple (AAPL) who have only experienced a less than 2% year-to-date decline in shares.
The biggest winner so far of big-cap tech has to be Alphabet (GOOGL) whose shares have risen around 25% since the beginning of the year.
Even with sky-high expectations, Google is hitting it out of the ballpark and then some.
Simply meeting or doing a nudge over expectations this past earnings season has proved not enough for underlying shares to surge on the results meaning we are fully priced.
Naturally, the more speculative business has felt the worst of the carnage with SPACs down half from their peaks and “artisanal” tech down 30%-50%.
This doesn’t mean tech is over.
Hardly so – It’s just resting.
But readers and investors will need to traverse through a period of multiple contraction and consolidation as high-priced tech stocks are re-rated lower until we reach appetizing multiples.
Simply put, we got ahead of ourselves and there is only so much leverage that can be taken out to chase the rainbows and feed off the momentum.
Microsoft (MSFT) has been another stout stock that is up around 12% year-to-date and a great place to hide out during the consolidation phase.
The cause of the rerating derives specifically from upper management guiding down future revenue and profitability targets.
I have read countless earnings reports that describe a comprehensive dilemma in which the overall structure of the company couldn’t be healthier yet beating prior years’ Covid performance is impossible on a year-to-year basis.
Readers need to understand this year is still priced as a Covid year, but tech companies won’t nearly do as well because the conditions that engulfed Covid like work-from-home and the absence of a vaccine are not here anymore.
There is a health solution in the U.S. and in parts of Europe there are partial solutions and certainly, no lockdown as the Chief of the CDC signals masks are not needed for the vaccinated in public.
The tech market needs to readjust its expectations that will hand off to more of a normalized metric environment and that will happen naturally as we move closer to 2022 and into it.
On a calculation basis, comparing data from 2022 and 2021 will strip out the volatility from the 2020 and 2021 comparisons.
Remember that management uses the prior year as reference points for performance and that phenomenon is now hurting the appearance of relative outperformance.
A top executive at a fintech company had this to say, “The pandemic has accelerated a digital wave of change across almost every industry by three to five years, unleashing a profound and permanent structural transformation.”
I’ll take a 5-year digital transformation in one year if the second year is a time that is needed for earnings’ expectations to consolidate for half a year or so.
I would take that deal anytime if it was my company.
The data also suggests how breathtaking companies like Google and Microsoft are if their future guidance is immune to any expectation.
They are beating whatever consensus is in a Covid year or not.
Take a look at some of the darlings of tech in the height of pandemic like Teladoc (TDOC), and shares are off around 33% year-to-date and even went through a 40% drop from mid-February to the beginning of March.
Avoid those now!
Even if it's not related to cloud software stocks, the dearth of semiconductor chips is beginning to cause pain in every nook and cranny of the global economy catalyzing many firms to delay or even cancel production let alone roll out new models.
This adds to the global malaise of a supply chain that many managements describe as “topsy-turvy.”
Not only is the bottleneck happening as we speak, but it appears as though it could last at least 2 or more years.
When the Fed talks about “transitory” inflationary pressures, at least as it relates to tech, I am not sure what they are smoking.
There has been no concrete data in which they have offered to suggest that it will be transitory unless they have a different definition of transitory from mine.
The accumulation effect of these pressures is why the tech-heavy Taiwan stock market, FTSE TWSE Taiwan 50 Index, comprised of tech stalwarts like Taiwan Semiconductor Manufacturing (TSM) and Hon Hai Precision Industry, declined over 2% today after losing over 8% last week.
Ultimately, investors are moving to higher ground and seeking predictable profitability and raw size over elevated growth rates and loss-making EPS figures.
When the goalposts move, we must move with them and that is what has happened.
Tech investors are more conservative than last year and until the goalposts widen a bit as I expect as we move into Q3 and Q4, we need to be aware of the new rules of the game or who gets penalized for them.
Mad Hedge Technology Letter
April 30, 2021
Fiat Lux
Featured Trade:
(A QUARTER TO REMEMBER FOR TIM COOK)
(AMZN), (AAPL)
Investors looking to park their cash in an emerging tech stock have to reckon with the earnings’ strength of a company like Apple (AAPL).
Eventually, any artisanal tech company hoping to deliver you a 10 bagger will need to adjust their sights that at some point in their future, they will need to directly compete with an Apple or Amazon (AMZN).
That is what is so scary for the little guys.
There were bountiful eye-popping numbers serving as ironclad proof to investors that sticking with the Goliaths is the sure-fire approach to grind your way up to more wealth.
A tech company Apple’s size expanding quarterly revenue to almost $90 billion last quarter representing a 54% year-over-year growth rate is stuff of legends.
A 54% growth rate is what us analysts give a green light for regardless of the size of the company.
Many analysts like to resort to explaining the upcoming stifling of growth in big tech as the law of large numbers.
Apple has shown they can overcome almost anything.
And this was supposed to be the company in which they have a China issue.
The consensus is that Apple is a brilliant business with an even better operational model.
Three reasons why Apple is firing on all cylinders.
First, Apple’s installed base growth has accelerated and reached an all-time high across each major product category.
Second, the number of both transacting and paid accounts on Apple’s digital content stores reached a new all-time high during the March quarter, with paid accounts increasing double digits in each of our geographic segments.
Lastly, Apple’s paid subscriptions continued to show strong growth.
This trifecta of outperformance was why revenue in the March quarter broke a record of $89.6 billion an increase of over $31 billion or 54% from a year ago.
Management saw strong double digits in each product category, with all-time records for Mac and for services and March quarter records for iPhone and for wearables, home, and accessories.
Products revenue was a March quarter record of $72.7 billion, up 62% over a year ago.
Company gross margin was 42.5%, up 2.7% from last quarter driven by cost savings, a strong product mix and favorable foreign exchange.
iPhone revenues had a March quarter record of $47.9 billion, growing 66% year over year as the iPhone 12 family continued to be in high demand.
With unmatched 5G capability, the best camera system ever in an iPhone, and advanced durability from Ceramic Shield, this family of devices is popular with both upgraders and new customers alike.
In the US, the latest survey of consumers from 451 Research indicates customer satisfaction of over 99% for the iPhone 12 family.
Turning to services. Another all-time revenue record of $16.9 billion with all-time records for the App Store, cloud services, music, video, advertising, and payment services.
Apple’s new service offerings, Apple TV+, Apple Arcade, Apple News+, Apple Card, Apple Fitness+, as well as the Apple One bundle, continue to scale across users, content, and features and are contributing to overall services growth.
It was a quarter of sustained strength for wearables, homes, and accessories, which grew by 25% year over year.
Apple Watch is a global success story, and the category set March quarter records in each geographic segment, thanks to strong performance from both Apple Watch Series 6 and Apple Watch SE.
The Mac broke an all-time revenue record of $9.1 billion, up 70% over last year, and grew very strongly in each geographic segment.
This impressive performance was driven by the customer approval to new Macs powered by the M1 chip.
iPad performance was also outstanding with revenue of $7.8 billion, up 79%.
Where does Apple go from here?
First, hiring warm bodies and lots of them to try to meet all the extra incremental demand the company needs to satisfy in the near future.
Over the next five years, Apple will invest $430 billion, creating 20,000 jobs in the process.
The investments will support American innovation and drive economic benefits in every state, including a new North Carolina campus and job-creating investments in innovative fields like silicon engineering and 5G technology.
After hiring, Apple is laser-focused on shareholder return.
They were able to return nearly $23 billion to shareholders during the March quarter. This included 3.4 billion in dividends and equivalents and $19 billion through open market repurchases of 147 million Apple shares.
Apple’s board has authorized an additional $90 billion for share repurchases. They are also raising their dividend by 7% to $0.22 per share, and continue to plan for annual increases in the dividend going forward.
Lastly, management threw a damp towel on the feeling of success by removing guidance and talking about headwinds.
Management said that coming up, they would not offer specific financial guidance because of “continued uncertainty around the world in the near term.”
They also said that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior years.
Second, supply constraints will have a revenue impact of 3 to $4 billion in the June quarter meaning a lack of chips.
All in all, hard to be happier if you are an Apple long-term holder. This is a no-brainer buy and hold forever. Any substantial dip should be bought.
Mad Hedge Technology Letter
April 28, 2021
Fiat Lux
Featured Trade:
(ALPHABET IS A $3,000 STOCK)
(GOOGL), (MSFT), (AMZN), (AAPL), (TSLA)
A company that did $182 billion of annual revenue last year expanding first quarter revenue at a 34% clip year-over-year is something that is hard to contemplate; but that is how big the big have gotten, and at the top of the heap is Alphabet (GOOGL).
Expect similar type of earnings reports from Amazon (AMZN).
The 4 tech firms of Alphabet (GOOGL), Apple (AAPL), Microsoft (MSFT) and Tesla (TSLA) were in perfect strategic position going into the public health crisis, and now we find ourselves almost at the climax of it, they are validating their current position in 2021 as companies that flourished through the pandemic and now find themselves with only green pastures in front of them.
Google has said it operates in a “competitive market place” but I do not know anyone who uses an internet search service that isn’t named Google.
It’s like trying to live in China without using Wechat, Alibaba, and Baidu.
We are talking about services that perform like utilities.
Just analyze consumers’ behavior during the onslaught of the public health crisis.
Their first reaction was to delegate these important moments to Google Search.
Billions of searches every day for “COVID” and related health information took place.
At the same time, people started to job search on Google as million lost their jobs and these unemployed first reaction was to do a google search on unemployment benefits and where they could find a job.
To help them, job seekers can now use Search quickly and easily find roles that do not require a college degree and Google is working together with the top employment websites to make the service even better.
And if you thought the reach of Google stopped there, then what about when not searching for jobs or health solutions on Google search.
Well, first, food delivery searches on Google, then, conveniently, since lockdowns pervaded the world, YouTube’s video streaming had its best year.
Users continue to find all types of informational content, from educational videos to podcasts on YouTube.
In fact, according to a recent study conducted by Ipsos, 77% of respondents say they used YouTube during 2020 to learn a new skill.
YouTube Shorts, Google’s TikTok imitation service, continues to gain popularity with over 6.5 billion daily views as of March, up from 3.5 billion at the end of 2020.
The financial metrics backed up the popularity in YouTube with YouTube advertising revenues of $6 billion, up 49%, driven by exceptional performance in direct response and ongoing strength in brand advertising.
Network advertising revenues of $6.8 billion, up 30%, driven by AdMob and Ad Manager.
What if you don’t have a device to watch YouTube or search on Google Search for jobs and food delivery?
Easy answer, buy a Google device.
Other revenues were $6.5 billion, up 46%, primarily driven by growth in Play and YouTube non-advertising revenues, followed by hardware, which benefited from the addition of Fitbit revenues. Google Services operating income was $19.5 billion, up 69%, and the operating margin was 38%.
Google has you covered.
Then what about the people who have jobs and need a cloud to store their files.
Google’s Cloud segment, including GCP and Google Workspace, revenues were $4 billion for the first quarter, up 46%.
GCP's revenue growth was again meaningfully above Cloud overall. Strong growth in Google Workspace revenues was driven by growth in both seats and average revenue per seat.
Google has that covered as well and fusing their cloud operability with Google’s suite of services like Gmail has been reliable for many work from home workers.
This company has covered all their bases and they were doing this before the public health crisis.
Alphabet currently has $1.55 trillion of market cap, but this is easily a $2 trillion company on its way to $3 trillion with no headwinds in sight.
I wouldn’t even call regulation that big of risk and obviously investors keep piling into this stock because they know that even if Google gets broken up, each individual part will be worth more unpacked as a single service because they are the best of breed already.
Microsoft and Alphabet are the two companies vying for the best and most powerful in the world.
At, $1.97 trillion in market cap, Microsoft is more expensive than Google because even though they both earn over $40 billion in profits per year, Microsoft makes that on 27% less revenue than Alphabet which is why they have a higher premium.
Microsoft is more efficient than Alphabet, but again, if Alphabet is broken up, watch for efficiency metrics to skyrocket as each individual business isn’t hindered by the bureaucracy that has turned into how Google operates.
If Alphabet can inch up the margin story, they will be a $2 trillion company and $3,000 stock by the end of 2021.
Global Market Comments
April 26, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE CORRECTION IS OVER)
(PAVE), (NFLX), (AAPL), (AMD), (NVDA), (ROKU), (AAPL), (AMZN), (MSFT), (FB), (GOOGL), (TSLA), (KSU), (CP), (GS), (UNP) (LEN), (KBH), (PHM)
This is a classic example of if it looks like a duck and quacks like a duck, it’s definitely not a duck….it’s a giraffe.
In stock market parlance, that means we have just suffered an eight-month correction which is now over. Look at the charts and a correction is nowhere to be found. The largest pullback we have seen in the past year has been a scant 12% dip right before the presidential election.
If that’s all the pain we have to suffer to be rewarded with an 80% gain, I’ll take that all day long.
Instead, what we have seen has been a series of sector-specific rolling corrections that were masked by the indexes that were steadily grinding up.
During this time, the best quality stocks endured pretty dramatic hits, like Netflix (NFLX) (-21%), Apple (AAPL) (-26%), Advanced Micro Devices (AMD) (-25%), NVIDIA (NVDA) (-28%), and Roku (ROKU) (-40%).
Stocks sold off hard after Q1 earnings. They are doing the same now with Q2 earnings. That ends on Tuesday after the close when the 800-pound gorilla of them all announces on Wednesday, April 28.
After that, we could be in for another leg in the bull market that could take us up by 10% by the summer.
Some 85% of all companies are now beating forecasts handily. But half are seeing shares fall after the announcement. That shows how professional the market is getting. So, if you eliminate the earnings announcement, you eliminate the share falls?
This is all in the face of economic growth predictions of lifetime proportions. Analysts are now looking for 43% earnings growth in Q2, 55% in Q3, and 75% in Q4. These are WWII-type numbers.
And the Fed put is still good at the bank. Jerome Powell is promising no rate rises until 2023 on an almost daily basis.
It all sets up a continuing pattern of sideways “time” corrections like we’ve just seen followed by frenetic legs up to new highs. This could go on for years.
It worked last time.
The coming week should be quite a blockbuster. It is only the fifth time in history that the five largest stocks in the S&P 500 accounting for 25% of the market cap all report in the same week. These are Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Facebook (FB), and Alphabet (GOOGL).
That’s going to leave a mark! Biden’s rumored proposal that high-end earners will see doubled capital gains taxes knocked 500 points of the Dow in seconds. The new tax would apply to Americans earning a net income of $1 million or more. Never mind that congress would have to approve the move first, as Trump found out to his chagrin. It’s a trial balloon that was shot down immediately. Trump had planned to cut capital gains to a 15% rate and run a bigger deficit.
It would only apply to Americans who own stocks and never sell. Guess why? To avoid taxes, dummy!
US Stock Funds take in a record $157 billion in March. That beats the record $144 billion that came in during February. Warning: these massive cash flows are consistent with short-term market tops. Vanguard and iShares index funds took in far and away the most money. The Global X US Infrastructure Fund (PAVE) was one of the most popular directed funds.
The labor shortage is on, with companies engaging in mass hiring and paying signing bonuses for low-end jobs. I was awoken by workers putting up a fence next door on a Saturday morning. They’re working weekends to pay back the debts they ran up last year to keep eating. If you are planning any jobs this year, buy the materials now. The country will be out of everything in three months, with current quarter GDP topping a historic 10%.
SPACS have crashed, with the average SPAC down 23% since the February top, and some like Virgin Galactic Holdings off by 50%. Don’t touch these things with a ten-foot pole, as 80% will go under or shut down with no investments. It reminds me of five online pet food companies at the Dotcom Bubble top. It's all a symptom of too much cash flooding the financial system.
Takeover battle for Kansas City Southern (KSU) ensues, with Canadian Nation making a sweeter $33.7 billion offer than Canadian Pacific’s (CP) $30 billion bid. It just shows how valuable railroads really are in a booming economy that urgently needs to move a lot of stuff. Good thing I’m long (UNP). Is the Reading Railroad still available? How about the B&O or the Short Line?
Yellen sets Zero Emissions Target for 2035. That sets up one of the biggest investment opportunities of the century. The trick is to find companies that have viable technologies that can make a stand-alone profit that haven’t already gone up ten times, like Tesla (TSLA). Most of the new EV IPOs aren’t going to make it. This will be a major focus of Mad Hedge research going forward. I hope I live that long!
Existing Home Sales down 12.3% YOY, down 3.7% in March, to 6.03 million units. Prices are up 17.02% YOY, the highest on record. Sales of homes over $1 million are up 108%. Inventory is still the issue, down to only 1.07 million units, off 28% in a year. Truly stunning numbers.
New Home Sales up a ballistic 20.7% YOY in March on a signed contracts basis. This is in the face of rising home mortgage interest rates. The flight to the suburbs continues. Homebuilder stocks took off like a scalded chimp. Buy (LEN), (KBH), and (PHM) on dips.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 9.48% gain during the first half of April on the heels of a spectacular 20.60% profit in March.
I used the dip early in the week to add two more positions in Goldman Sachs (GS) and Union Pacific (UNP). I suffered a day of buyer’s remorse on Thursday when Biden floated his capital gains plan and tanked the Dow by 500 points. Then everything took off like a rocket to new highs on Friday.
That leaves me 80% invested and 20% in cash. The markets went up too fast to get the last match of money in the market.
My 2021 year-to-date performance soared to 53.57%. The Dow Average is up 12.3% so far in 2021.
That brings my 11-year total return to 476.12%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.01%, the highest in the industry.
My trailing one-year return exploded to positively eye-popping 132.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 31.9 million and deaths topping 570,000, which you can find here.
The coming week will be big on the data front, with a couple of historic numbers expected.
On Monday, April 26, at 8:30 AM, US Durable Goods for March are out. Earnings for Tesla (TSLA) and NXP Semiconductors (NXP) are out.
On Tuesday, April 27, at 9:00 AM, we learn the S&P Case Shiller National Home Price Index for February. We also get earnings for Alphabet (GOOGL), Microsoft (MSFT), and Visa (V).
On Wednesday, April 28 at 2:00 PM, The Fed Open Market Committee releases its Interest Rates Decision. The following press conference is more important. Apple (AAPL), Boeing (BA), and QUALCOMM (QCOM) earnings are out.
On Thursday, April 29 at 8:30 AM, the Weekly Jobless Claims are printed. We also obtain the blockbuster US GDP for Q1. Amazon (AMZN), Caterpillar (CAT, and Merck (MRK) release earnings.
On Friday, April 30 at 8:30 AM, we get US Personal Income and Spending for March. Exxon Mobile (XOM) and Chevron (CVX) release earnings. Berkshire Hathaway (BRK/B) announces the next day. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, after telling you last week why I walked so funny, let me tell you the other reason.
In 1987, to celebrate obtaining my British commercial pilot’s license, I decided to fly a tiny single-engine Grumman Tiger from London to Malta and back.
It turned out to be a one-way trip.
Flying over the many French medieval castles was divine. Flying the length of the Italian coast at 500 feet was fabulous, except for the engine failure over the American airbase at Naples.
But I was a US citizen, wore a New York Yankees baseball cap, and seemed an alright guy, so the Air Force fixed me up for free and sent me on my way. Fortunately, I spotted the heavy cable connecting Sicily with the mainland well in advance.
I had trouble finding Malta and was running low on fuel. So I tuned into a local radio station and homed in on that.
It was on the way home that the trouble started.
I stopped by Palermo in Sicily to see where my grandfather came from and to search for the caves where my great-grandmother lived during the waning days of WWII. Little did I know that Palermo was the worst wind shear airport in Europe.
My next leg home took me over 200 miles of the Mediterranean to Sardinia.
I got about 50 feet into the air when a 70-knot gust of wind flipped me on my side perpendicular to the runway and aimed me right at an Alitalia passenger jet with 100 passengers awaiting takeoff. I managed to level the plane right before I hit the ground.
I heard the British pilot say on the air “Well, that was interesting.”
Giant fire engines descended upon me, but I was fine, sitting on my cockpit, admiring the tree that had suddenly sprouted through my port wing.
Then the Carabinieri arrested me for endangering the lives of 100 Italian tourists. Two days later, the Ente Nazionale per l’Avizione Civile held a hearing and found me innocent, as the wind shear could not be foreseen. I think they really liked my hat, as most probably had distant relatives in New York.
As for the plane, the wreckage was sent back to England by insurance syndicate Lloyds of London, where it was disassembled. Inside the starboard wing tank, they found a rag which the American mechanics in Naples had left by accident.
If I had continued my flight, the rag would have settled over my fuel intake vavle, cut off my gas supply, and I would have crashed into the sea and disappeared forever. Ironically, it would have been close to where French author Antoine de St.-Exupery (The Little Prince) crashed in 1945.
In the end, the crash only cost me a disk in my back, which I had removed in London and led to my funny walk.
Sometimes, it is better to be lucky than smart.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Antoine de St.-Exupery on the Old 50 Franc Note
Global Market Comments
April 21, 2021
Fiat Lux
Featured Trade:
(WHY TECHNICAL ANALYSIS NEVER WORKS)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)
Global Market Comments
April 19, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or LIE BACK AND THINK OF ENGLAND)
(JPM), (BAC), (AAPL), (FXI), (TLT), (VIX), (TSLA)