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Market Outlook for the Week Ahead, or The Good News is Out

After a China trade deal, UK election and a NAFTA 2.0 are announced, what is left to drive the stock market?

That is a very good question and explains why the Dow Average was up only a microscopic 3.33 points on Friday. It had spent much of the day down.

It’s not a pretty picture.

Not only is the market running out of drivers, the economic data is still decelerating, with the GDP running a 1.5% rate, inflation rising, and corporate earnings growth at zero, with earnings multiples at 17-year high.

A Wiley Coyote moment comes to mind.

And while we are finishing a great 27% year (56% for the Mad Hedge Fund Trader), we are in effect getting three years of performance packed into one. Not only did we pull forward a good chunk of 2020’s performance, we borrowed heavily from 2018 as well, coming in at such a low start as we did.

Thus 2019 might well get bookended by an 8% gain in 2018 and another 8% year in 2020, with dividends. Blame it all on the massive liquidity burst we got from the Fed that started last December and continues unabated.

Stocks have been floated by a tidal wave of new money creation worldwide. Globally, new money creation is running at a $1 trillion a month rate and much of that is ending up in the US stock market, especially in technology shares.

The rush was enough to drive Apple (AAPL) to a new all-time high at $275, pushing its market capitalization up to a staggering $1.2 trillion. It could surpass Saudi ARAMCO’s $2 trillion valuation in a year or two.

Steve Jobs’ creation now accounts for a mind-blowing 6% of the S&P 500 and 4% of total US stock market capitalization. It’s the best argument I’ve ever heard for becoming a hippy and dropping out of college after one quarter.

Which leads us to paint a picture for the 2020 stock market. Even the most optimistic outlook for next year, that of Ed Yardeni, is calling for only a 10% gain. Many prognostications are calling for negative numbers next year.

You might be better off parking your money in a 2% CD and taking a cruise around the world. I’ve done that before, and it works fantastically well.

You’re only going to have one shot at making money in 2020. Wait for a 10%-20% nosedive to go long. My guess is that happens when it becomes clear that the Democrats are dominating in the polls (Joe Biden is currently 14 points ahead in swing state Pennsylvania). No matter who wins, less borrowing, less spending, and higher taxes will prevail.

Then stocks will rally 10% AFTER the election because the uncertainty is gone. That will get you a 20%-30% profit in 2020, but only of you are a trader and follow the Mad Hedge Fund Trader. After basking in their own brilliance in 2019, 2020 might be a year when indexers wish they never heard of the term.

In the end, corporate earnings growth always wins, especially in tech, which is still growing at 20% a year. Remember, my 2030 forecast for the Dow Average is 125,000.

China (FXI) won big in mini trade deal. We rolled back a tariff increase that was never going to happen and the Chinese buy $50 billion worth of soybeans they were going to buy anyway, except at half the price that prevailed two years ago. All of it will come out of stockpiles built up during the trade war. Only the ag sector is affected, which is 2% of the US economy. The ag markets aren’t buying it. If this were a real trade deal, stocks would be up 1,000 points, not 89.

Conservatives won big in UK election. The British pound (FXB) is up 2% and stocks are soaring. A hard Brexit is coming, so look for Scotland to secede and Northern Ireland to join the Republic. The UK will be gone as we know it. Britain’s standard of living will plummet. Great Britain will no longer be great, and the Russians financed the whole thing.

Volatility crashed, as complacency rules supreme. Don’t buy (VIX) until we see the $11 handle again.

Chinese copper purchases hit a 13-month high, up 12.1% in November, to 483,000 metric tonnes. It explains the 78% move up in Freeport McMoRan (FCX) since October, the world’s largest producer. Obviously, someone believes a trade deal is coming. My long LEAP players love it.

US Consumer inflation expectations rebounded, up 0.1% to 2.5%, accounting to the New York Fed. That’s crawling up from a five-year low, a slightly positive economic note.

Saudi ARAMCO went public, with a 10% pop in the shares on the first two days, providing a $24 billion fund raise. This is one of the top three largest IPOs in history after Alibaba (BABA) and Softbank. It values the company at $1.88 trillion. Oil (USO) is down a dollar on the news, no longer needing artificial support to get the deal done. This could be one of the seminal shorts of our generation.

NAFTA 2.0 was signed, removing a potential negative from the market. It is 90% of the original NAFTA, not the “greatest trade deal in history” as claimed. Buy the main North/South railroad, Norfolk Southern (NSC) on the news.

Weekly Jobless Claims soared to a two-year high, by 49,000 to 252,000. Are stores laying people off from Christmas early this year, or did they never hire in the first place because the retail businesses are gone? Peak jobs are in. US job growth is now far slower than in the Obama era, as is GDP growth.

Most US companies will have fewer staff in 2020, except Mad Hedge Fund Trader. More automation and algos mean fewer humans. Only a capital spending freeze caused by the trade war kept a low of low-skilled people in their jobs.

This was a week for the Mad Hedge Trader Alert Service to catapult to new all-time highs.

My long positions have shrunk to my core (MSFT) and (GOOGL), which expire with the coming December 20 option expiration.

My Global Trading Dispatch performance ballooned to +356.00% for the past ten years, a new all-time high. My 2019 year-to-date catapulted back up to +55.86%. December stands at an outstanding +4.85% profit. My ten-year average annualized profit rebounded to +35.59%.

The coming week will be a noneventful one on the data front, with some housing data and the Q3 GDP on the menu. Anyway, everyone else will be out Christmas shopping or attending parties.

On Monday, December 16 at 9:30 AM, New York Empire State Manufacturing Index for December is out.

On Tuesday, December 17 at 9:30 AM, Housing Starts for November are released.

On Wednesday, December 18 at 11:30 AM, US EIA Crude Stocks for the previous week are announced.

On Thursday, December 19 at 8:00 AM Existing Home Sales are published. At 8:30 AM, we get Weekly Jobless Claims.

On Friday, December 20 at 9:30 AM, the final read on US Q3 GDP is printed. The Baker Hughes Rig Count follows at 2:00 PM.

As for me, after blowing out 1,200 Christmas trees, the Boy Scouts will be taking down the tree lot for the year. And who do they turn to when it comes to wielding a chain saw or sledge hammer?

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

December 13, 2019

Tech Letter

Mad Hedge Technology Letter
December 13, 2019
Fiat Lux

Featured Trade:

(WHY THE FANGS ARE BREAKING INTO YOUR HOME)
(GOOGL), (AAPL), (AMZN), (ALRM), (ADT), (ARLO), (RESI), (PANW), (CRWD), (FTNT), (CSCO), (CMCSA), (BBY)

Why the FANGs are Breaking Into Your Home

Tech Letter

The house is the new smartphone and I will tell you why.

The projected market growth of 18% in smart home technology sales according to Acumen Researching and Consulting will deliver opportunities to shape and prioritize this sector.

The revenues up for grabs from the smart home mean that internet of things’ (IoT) companies will create systems that mesh together with the bare minimum human participation, meaning that tech will have a dramatic influence in our daily lives.

I get several moans and groans a day that the Mad Hedge Technology Letter only shines the spotlight on the FANGs.

But it is hard not to when it comes to the future of the home.

Just look at recent M&A activity.

Automation and connected smart appliances have consumed Amazon by recently acquiring Eero, producer of routers for apartments, houses, and multi-story homes, and after already paying $1 billion to acquire Ring, a doorbell-camera startup. It had also bought Blink, a smart camera maker in 2017.

Google hasn’t shied away either by investing in smart home products pocketing Nest, a firm producing smart home products, for $3.2 billion.

Nest took a few years to sort out its production phase but finally managed to launch new temperature sensors, a video doorbell, and an outdoor smart camera.

What are the trending IoT products now?

The flavors of the day are smart lights, security, entertainment systems, and temperature control.

They are the low hanging fruit of the smart home industry – a de facto gateway into this world.

Most of these smart devices operate with voice assistants, but because of the nature of competition, certain products are aligned with certain ecosystems and compatibility issues will persist until the competition flushes itself out.

A layman’s example would be Apple’s Homekit dovetailing nicely with Apple’s Siri.

Companies are in the first innings of the product iteration cycle and the variations of smart home products are endless stemming from showers that remember preferred water temperature and flow rates or climate-control systems that change in real-time to suit the user.

Security of home networks and connected devices are still a controversial question mark because the receiver of this type of data has the keys to the most intimate details of personal lives.

Even avid technologists are hesitant to dive in and put up smart home products all over the house, and most are being cautious.

In fact, privacy issues are the most distinct headwind to fresh adoption rates.

Many people simply aren’t willing to make the jump yet until they are more convinced of its use case.

Even with all the reservations, an alternative global shipment company believes smart home devices will post 24% in growth next year.

For the smart home device believers, this cohort averages 6 smart home devices per household and will certainly rise to 7 or 8 by the end of 2020.

Popular items include the Amazon Echo, Google Home, and Apple (AAPL) HomePod.

Smart speakers are already present in 36% of American homes and rising.

Consumers are also worried about technology invading their daily lives along with allowing artificial intelligence to dominate personal decision making.

Others have concluded that items such as smart microwaves are a waste of money and are unneeded when analog devices function admirably.

Another legitimate reason is that the software and technology involve a perceived steep learning curve to operate which many people do not have the patience for.

And some are just burnt out by the volume of technology thrown in our faces.

Who wants to operate 50 apps on their phone to control their smart home devices when there are other pressing needs in life?

Companies with skin in the game are Alarm.com (ALRM), ADT (ADT), Arlo Technologies (ARLO) and Resideo Technologies (REZI) and they will be outsized winners if they can solve many of the industries lingering issues.

The value thesis in the case of home automation companies is that they are financially efficient, time-effective, boost wellness and will be easy to use.

About 11% of U.S. broadband households have smart thermostats and Nest’s smart thermostat is the most popular.

Networked security cameras by Arlo are in 10% of homes.

Video doorbells from Amazon.com (AMZN), Google are in 8% of homes and help deter theft of e-commerce packages.

Smart light bulbs and lighting are at 8% market share while smart door locks are at 7% penetration.

There are several second derivates bet on this as well.

The most common user interface for the smart home is apps on a smartphone or tablet and voice commands to smart speakers are second.

The conundrum of installation complexities leads to the demand of professional installers.

This demand has delivered opportunities for companies like Comcast's (CMCSA) Xfinity and Vivint.

Electronics retailer Best Buy (BBY) has stepped up its footprint in this market as well.

Another stock play would be cybersecurity companies because they will win contracts protecting the software that smart home products rely on.

Hackers are getting more sophisticated and a private cybersecurity company Firewalla can track where data is flowing to and from your devices.

Firewalla management recommends buying devices from reputable home automation companies like Amazon and Google because they have more accountability and are of higher quality.

There will be a huge onramp of cybersecurity contracts doled out to the likes of Palo Alto Networks, Inc. (PANW), CrowdStrike Holdings, Inc. (CRWD), Fortinet, Inc. (FTNT), and Cisco Systems, Inc. (CSCO).

We are in the first mile of a marathon and smart home product manufacturers, cybersecurity companies, 5G internet, and semiconductor companies will all benefit from the broad-based integration of these next-generation home consumer products.

December 11, 2019

Tech Letter

Mad Hedge Technology Letter
December 11, 2019
Fiat Lux

Featured Trade:

(CHERRY-PICKING IN TECH TODAY)
(ZM), (CRM), (GOOGL), (AAPL)

Cherry-Picking in Tech Today

Tech Letter

The valedictorian of the IPO class Zoom Video Communications, Inc. (ZM) is finally on sale at a discount.

If readers want to indulge themselves in a high caliber tech growth stock to buy and hold stock, this is the one for you.

This one has no regulatory headwinds as well as an added bonus.

Zoom’s share price has dropped 40% since hitting the heights of $102 in July which was coincidentally the high for most post-IPO tech stocks of 2019.

It’s been an elevator straight down to no man’s land since then, but investors would be foolish to paint all hyper-growth companies with the same brush.

Filtering out the wheat from the chaff is critical and Zoom is the stock that still has the gloss on its outside package buttressed by its best in show video conferencing software.

There are no other proper alternatives in this sub-sector of software.

A few days ago, the stock slid 9% even though the company crushed expectations with its latest quarterly result and outlook.

Zoom generated revenue of $166.6 million representing a growth rate year on year of 85%.

The company then offered a forecast of $175 million next quarter when analysts only estimated $165 million.

Remember that this company grew 96% just 2 quarters ago and it would be illogical to believe that the stock is being penalized from faltering to 85% today.

Any tech company would give a left leg for 85% growth.

Zoom was trading at 33.5 times my calendar 2020 estimates compared to the fast growth software as a service (SaaS) median at 12.9 times.

Then software stocks started indiscriminately selling off on earnings over the past few weeks irrelevant to the quality of news because of worries to the broader bull market in tech stocks.

It’s true that tech stocks aren’t cheap now, and the skittishness rears its ugly head when bullet-proof earnings’ results are met with a cascade of selling.

Salesforce (CRM) was a software company that was penalized for pricey M&A because the company has been unable to organically grow forcing them to buy growth.

Buying growth is not necessarily a bad strategy but buying growth at this point in the economic cycle naturally means that companies will need to overpay for growth because of expensive valuations.

Zoom is perfectly positioned to outperform in the next 2-3 years.

The advancing runway is wide open with no competition in sight and a generous growth trajectory is firmly on their side.

We Company singlehandedly destroyed positive biased market momentum for any tech growth stock this summer, but on the bright side, quality post-IPO growth stocks are more reasonably priced with compelling entry points.

At around $60, Zoom looks appetizing and is a convincing buy and hold. At some point, this software company could become a takeover target for a larger corporate because companies such as Google (GOOGL) and Apple (AAPL) will need to acquire growth moving forward.

I am impressed with Zoom's superior products, growth prospects, and scalable business model, and the stock’s near-term risk/reward trade-off is attractive after the 9% haircut this past week.

There is an actionable and manageable clear path to a $2 billion revenue run rate with strong margin expansion potential and with its flagship product growing around 80-90%, its next growth driver in Zoom Phone could translate well into a meaningful revenue stream.

Zoom Phone is the next springboard to further success for this company.

Anyone that has used Zoom as a product can confirm the veracity of its superior performance standards.

This isn’t the type of stock to trade short-term, the volatility undermines any potential entry points.

If the broader market holds up in 2020, and Zoom isn’t a $100 stock by yearend, then the stars should align by 2021 because the value extraction potential is substantially robust in Zoom’s business model.

We finally have a reasonable level to scale into Zoom, and if it drops into the $50 range, it’s not just a scale-in type of scenario, investors should buy as much as they can with two hands.

Growth stocks can only be pinned down for so long and the best and brightest have been unfairly penalized with the rest. And let me remind you, this patch of softness in shares is only ephemeral and now is the time to act.

December 4 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader December 4 Global 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: How do you see the markets playing out in 2020?

A: Well, I’m looking at small single-digit positive returns with a lot of volatility. Much of this year’s performance—30% in the S&P 500 (SPY), up 56% for the Mad Hedge Fund Trader—has already been pulled forward from 2020, thanks to super low interest rates and massive deficit spending. So, the more money we make now, the less money we make next year.

Q: How deep will the next recession be?

A: I’m looking for two quarters of small negative numbers like -0.1% or -0.2%, and then it’s off to the races again. That’s when the Golden Age of the Next Roaring Twenties starts, which I have already written a book about (click here).
And it’s possible we may not even see any negative numbers on a quarterly basis; we may just get close to zero, threatening it without actually breaking it. Of course, you could still get a 20% correction in the overall stock market if they only THINK we are going into recession, which has happened many times in the last 10 years.

Q: Are you expecting a market crash?

A: No; I do expect a meaningful pullback but frankly, right now, I do not see the conditions in place for that. None of the traditional causes of recessions, high-interest rates or high oil prices, are evident yet. The biggest threat to the market right now is the 2020 presidential election. And we are at a 14-year high in stock valuations.

Q: How bad will it get for car makers, and will the Tesla (TSLA) plant in Germany affect sales for European cars?

A: European carmakers have already been badly affected by Tesla, with Tesla taking over practically the entire luxury end of the market—that’s why companies like Mercedes, Audi and BMW are doing so badly with their shares, and they’re so far behind it’s unlikely they’ll ever catch up. The Berlin factory, I believe, is a battery factory, and after that, there will be a vehicle production factory, probably somewhere in eastern Europe where the cost basis is much lower.

Q: Double Line Capital’s CEO Jeff Gundlach says the US will get crushed in the next recession? Do you agree with him?

A: Well, my first advice to you is never take stock advice from a bond trader. Jeff Gundlach makes these spectacular forecasts, but the timing can be terrible. He can be wrong for 9 months before they finally turn. So, you can go out of business trading off of Jeff Gundlach’s stock advice, though his bond advice is valuable.

Q: Do you have any good recommendations for dividend stocks?

A: Yes, look at the entire cellphone towers REIT sector. That will be a growth sector next year with 5G rolling out and they have very high dividend yields. We’re going to get a significant increase in the number of cell towers thanks to 5G, and there are REITs specifically dedicated to cellphone towers. An example is Crown Castle (CCI), which has a generous 3.45% dividend yield.

Q: Are we in the final stages of a blow-off top for the stock market?

A: Yes, but blow-off tops can continue for many months, so don’t rush to sell short. However, next time the VIX gets down to 11, start buying six-month call options on the Volatility Index (VIX) at the $20 strike price. Go far out in the calendar to minimize time decay and far out of the money on strike prices to maximize your bang per buck.

Q: Gold had a nice day on Monday—is this the start of a reversal from the selling pressure?

A: No, as long as the market is pushing to new highs, which it seems to be doing—you don’t want to be anywhere near gold; wait for a better opening lower down.

Q: Are you sending Trade Alerts out on the Mad Hedge Biotech & Healthcare letter?

A: Not in the form that we see in Global Trading Dispatch or the Mad Hedge Technology Letter. Essentially, everything we’ve put out so far has been a long term buy. Most people know nothing about these sectors and we’re trying to get them into buyable names. So far, we’ve issued “BUYS” for 20 different companies; all of them have gone straight up. So, it’s really more of a long term buy-in hold situation. Since we’re in the very early days of the boom in biotech and healthcare stocks, you don’t want to leave money on the table with short term trade alerts for call spreads when there is a double or triple in the stock at hand. We are doing call spreads in the main market where most stocks are already at all-time highs in order to limit our risk.

Q: Fidelity just said that 50% of baby boomers who manage their own portfolio should rebalance it. What do you think is the best way to optimize my portfolio, as a baby boomer born in 1954?

A: You should always rebalance every year, especially when you get enormous moves in single sectors. The interesting thing this year is that everything went up, so you may not need to rebalance that much. When I say rebalance, I’m referring to rebalancing your weightings of stocks vs bonds. If you’re over 50, you want to have roughly a 50/50 ratio on those. That would suggest pairing back some of your equity weightings, increasing your bond weighting because stocks (SPY) (30% total return) have risen a lot more than bonds (TLT) (19% total return) this year.

Q: Marijuana stock Tilray (TLRY) has just had a pitiful year going from $100 to $20 and missed earnings targets for 4 for straight quarters. Could this go to zero?

A: Yes; after all, how hard is it to grow a weed? I never bought the story on the whole marijuana sector, not only because they are not allowed to participate in the financial sector. It’s an all-cash business; you hear about people moving around suitcases full of $100 bills doing deals in Oakland and Denver. I believe anybody can do this. My real estate agent is quitting his business to go into cannabis farming. Additionally, they’re getting a lot of competition from the black market where everybody used to buy their marijuana because it’s tax-free. There’s about a 40% price difference between the tax-paying legal form of marijuana and the tax-free black market where people used to get their marijuana. There’s no great value added there. It’s not like they’re designing a 96 stack microprocessor.

Q: What do you think about Ali Baba (BABA), the Chinese internet giant?

A: I love it long term. Short term, it will be subject to trade war gyration; so use the big dips to buy into it because long term we come out of this.

December 6, 2019

Tech Letter

Mad Hedge Technology Letter
December 6, 2019
Fiat Lux

Featured Trade:

(AUGMENTED REALITY IS HEATING UP),
(AAPL), (LITE), (QCOM), (NVDA), (ADSK), (FB), (MSFT), (SNAP)

Augmented Reality is Heating Up

Tech Letter

First, what is augmented reality for all the newbies?

Augmented reality is an interactive experience of a real-world environment where the objects that reside in the real world are enhanced by computer-generated perceptual information, sometimes across multiple sensory modalities.

Augmented reality (AR) went rival in 2016 when the Pokemon Go mania captivated everyone from children to adults.

No sooner than 2021, the AR addressable market is poised to mushroom to $83 billion - a sizeable increase from the $350 million in 2018.

Much like machine learning, corporations are learning to marry up this technology with their existing products supercharging the performance.

Ulta Beauty, for example, has acquired AR and artificial intelligence start-ups to help customers digitally test the final appearance of makeup before users purchase the product.

That is just one micro example of what can and will be achieved.

Looking deeper into the guts, Qualcomm (QCOM) is hellbent on making their chips a critical part of the puzzle.

The company is better known for a telecom and a semiconductor play, not often lumped in with a list of AR stocks.

Qualcomm is strategically positioned to capitalize on the integration of augmented reality in mainstream corporate business embedding their chips into the devices.

Maximizing Qualcomm’s future role in the industry, the company announced in 2018 that it would be developing a chipset specifically for AR and VR applications.

This broad-based solution will make it easier for other developers to bring new glasses to the marketplace.

Autodesk (ADSK) is one of my favorite software stocks and a best of breed of industry design.

They sell 3D rendering software to designers and creators by offering a platform in which they can transform 2D designs into digital models that are both interactive and immersive, creating compelling experiences for end-users.

Autodesk has an array of powerful software suites to augment virtually any application, such as 3ds Max, a 3D modeling program; Maya LT game development software; its automotive modeling program VRED; and Forge, a development platform for cloud-based design.

Facebook (FB) has been piling capital into AR for years.

CEO Mark Zuckerberg wants to create an alternative profit-driver and is desperate to wean his brainchild from the digital ad circus.

One example is Facebook’s Portal TV and its Spark AR which is the platform responsible for mobile augmented reality experiences on Facebook, Messenger, and Instagram.

It supplies the virtual effects for consumers to play around with, but it is yet to be seen if consumers gravitate towards this product.

Lumentum (LITE) is the leader in 3D-sensing markets developing cloud and 5G wireless network deployments.

They manufacture 3D sensor lasers that can be used with smartphones to turn handsets into a sort of radar. Sensors are clearly a huge input in how AR functions along with the chips.

CEO of Apple (AAPL) Tim Cook put it best when he earlier said, “I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you.”

He said that in 2016 and AR has yet to mushroom into the game-changing sector initially thought partly because the roll-out of 5G is taking longer than first expected.

Apple consumers will need to then adopt a 5G device or phone to really get the AR party started and that won’t happen until the backend of next year.

My initial channel checks hint that the Cupertino firm is planning a 5.4-inch model, two 6.1-inch devices, and one 6.7-inch phone, all of which will support 5G connectivity.

I surmise that Apple’s two premium devices will feature “world-facing” 3D sensing, a technology that could help Apple boost its augmented-reality capabilities and support other feature improvements on its priciest devices.

Apple has had a big hand in Lumentum's growth and will continue to buy their sensors, but other key component suppliers will get contracts such as Finisar, a manufacturer of optical communication components and subsystems.

Apple planned to debut AR glasses by 2020, but the rollout is now delayed until 2022.

They are clearly on the back foot with Microsoft (MSFT) further along in the process.

Microsoft already has a second iteration of its AR headset, HoloLens, and is compatible with several apps and has integration with Azure as well.

The head start of 2 years could really make a meaningful impact and might be hard for Apple to recover.

Facebook isn’t the only social media company going full steam into AR, Snap (SNAP) recently unveiled its newest spectacles, which feature AR elements.

Another application of AR is autonomous driving with Nvidia working on improving the driving experience by fusing AR with artificial intelligence.

Nvidia (NVDA) is already thinking about the next generation of AR technologies with varifocal displays, which improve the clarity of an object for a user.

It will take time to transform our relationship with AR, the infrastructure is still getting built out and many people just don’t have a device that will allow us to tap into the technology.

Investors must know that AR-related stocks will start to appreciate from the anticipation of full sale adoption and there could be a killer app that forces the mainstream user to take notice.

Until then, companies jockey for position and hope to be the ones that take the lion’s share of the revenue once the technology goes into overdrive.

November 25, 2019

Tech Letter

Mad Hedge Technology Letter
November 25, 2019
Fiat Lux

Featured Trade:

(AI HAS REACHED FARTHER THAN YOU THINK),
(AMZN), (MSFT), (AAPL)

AI Has Reached Farther Than You Think

Tech Letter

I was lucky enough to get my hands on the Deloitte Private Technology Trends report named, “Seizing Opportunity.”

I’ll break down some of the gems I took away that will give us insight into the current state of technology.

This might not be necessarily a new idea because artificial intelligence has been around for a while, but it certainly is gaining steam with respondents placing greater value on artificial intelligence to drive business results.

Firms are using AI for analysis automation 48% of the time in 2019 versus 30% in 2018, putting the responsibility on this technology to super-drive profits.

It’s not a surprise that big data analysts have become one of the most sought-after commodities in Silicon Valley.

It’s appropriate to say that the FANGs have pulled away from any resemblance of competition in 2019 and this if forcing many mid-market and private companies to view talent and emerging technologies as the x-factors to stay competitive.

Behemoth tech companies have the luxury of cheap access to capital to buy out competition or break it by throwing money at problems until they can copy the technology and scale it applying force multiplier ecosystems to cross-pollinate and intertwine services with each other.

These same companies buy back their own stock with cheap capital enriching stakeholders and management.

In fact, Apple (AAPL) is buying back so much stock that it will have bought out its entire trove of stock by 2030 to effectively go private.

Deloitte found that 43% say they are spending more than 5% of their firm’s revenue on technology, a 15-point increase since 2016.

More than half of respondents forecast annual growth rates of 11% or higher and 68% plan to hire to harness the emerging technology.

Another trend that will pick up steam that I have noted before is the predictive analytics and legacy system modernization, and this is topping private companies’ investment priorities list.

In fact, the number of private companies surveyed using predictive analytics to diagnose business results skyrocketed 65% over the past five years.

Firms are prioritizing information security risks, the adoption of 5G technology, and business innovation over the next 365 days.

Digital disruption is the norm du jour.

Firms expect shifts in sales (55%), marketing (50%), and supply chain roles (49%) in the next 3-5 years.

In preparation, 54% of mid-market and private companies are re-skilling employees and 52% are reconfiguring jobs to accommodate this shift.

Also, 72% believe internal development and reskilling is a method to enhance employees’ potential because of the exorbitant costs of talent acquisition.

Over two-thirds (69%) will construct new talent acquisition strategies to marry it up with the trend of hiring in data analytics, AI and other emerging technologies.

In a major reversal, respondents are less likely to seek out crowdsourcing and gig economy workers because these types of workers are less effective than full-time workers and have high turnover rates.

More than 32% of private companies acknowledge that embedded value is trending towards machine learning, robotic process automation and other cognitive capabilities, a 12% increase from 2018’s survey results.

Although executives are experiencing greater benefits from AI technologies, more than one-half of respondents (55%) are worried about the use of AI, particularly when it comes to HR decision-making.

Personally, I believe using AI in HR is mostly flawed.

In short, firms are doubling down on “emerging technologies” and to combat the superior business models of big tech companies.

They almost have no choice.

These conditions favor the status quo of behemoth tech titans who can invest in machine learning and artificial intelligence because of their cheap sources of capital.

From the data, smaller companies are desperate to hang on to their talent because of a shrinking talent pool and high talent acquisition cost.

The belief that leveraging foundational technologies to springboard revenue is only getting stronger. This favors the goliaths at the top because they have the resources to integrate these levers unlike companies further down the food chain.

This article could almost signal why investors can’t be short Apple (AAPL), Microsoft (MSFT), and Google (GOOGL).

They are at the vanguard of every major technology trend and they have demonstrated that they are definitely “seizing opportunity.”

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