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Why China is Driving Up the Value of Your Tech Stocks

Reduce the supply on any commodity and the price goes up. Such is dictated by the immutable laws of supply and demand.

This logic applies to technology stocks as well as any other asset. And the demand for American tech stocks has gone global.

Who is pursuing American technology more than any other? That would be China.

Ray Dalio, founder and chairman of hedge fund Bridgewater Associates, described the first punch thrown in an escalating trade war as a “tragedy,” although an avoidable one.

Emotions aside, the REAL dispute is not over steel, aluminum, which have a minimal effect of the US economy, but rather about technology, technology, and more technology.

China and the U.S. are the two players in the quest for global tech power and the winner will forge the future of technology to become chieftain of global trade.

Technology also is the means by which China oversees its population and curbs negative human elements such as crime, which increasingly is carried out through online hackers.

China is far more anxious about domestic protest than overseas bickering which is reflected in a 20% higher internal security budget than its entire national security budget.

You guessed it: The cost is predominantly and almost entirely in the form of technology, including CCTVs, security algorithms, tracking devices, voice rendering software, monitoring of social media accounts, facial recognition, and cloud operation and maintenance for its database of 1.3 billion profiles that must be continuously updated.

If all this sounds like George Orwell’s “1984”, you’d be right. The securitization of China will improve with enhanced technology.

Last year, China’s communist party issued AI 2.0. This elaborate blueprint placed technology at the top of the list as strategic to national security. China’s grand ambition, as per China’s ruling State Council, is to cement itself as “the world’s primary AI innovation center” by 2030.

It will gain the first-mover advantage to position its academia, military and civilian areas of life. Centrally planned governments have a knack for pushing through legislation, culminating with Beijing betting the ranch on AI 2.0.

China possesses legions of engineers, however many of them lack common sense.

Silicon Valley has the talent, but a severe shortage of coders and engineers has left even fewer scraps on which China’s big tech can shower money.

Attempting to lure Silicon Valley’s best and brightest also is a moot point considering the distaste of operating within China’s great firewall.

In 2013, former vice president and product spokesperson of Google’s Android division, Hugo Barra, was poached by Xiaomi, China’s most influential mobile phone company.

This audacious move was lauded and showed China’s supreme ability to attract Silicon Valley’s top guns. After 3 years of toiling on the mainland, Barra admitted that living and working in Beijing had “taken a huge toll on my life and started affecting my health.” The experiment promptly halted, and no other Silicon Valley name has tested Chinese waters since.

Back to the drawing board for the Middle Kingdom…

China then turned to lustful shopping sprees of anything tech in any developed country.

Midea Group of China bought Kuka AG, the crown jewel of German robotics, for $3.9 billion in 2016. Midea then cut German staff, extracted the expertise, replaced management with Chinese nationals, then transferred R&D centers and production to China.

The strategy proved effective until Fujian Grand Chip was blocked from buying Aixtron Semiconductors of Germany on the recommendation of CFIUS (Committee on Foreign Investment in the United States).

In 2017, America’s Committee on Foreign Investment and Security (CFIUS), which reviews foreign takeovers of US tech companies, was busy refusing the sale of Lattice Semiconductor, headquartered in Portland, Ore., and since has been a staunch blockade of foreign takeovers.

CFIUS again in 2018 put in its two cents in with Broadcom’s (AVGO) attempted hostile takeover of Qualcomm (QCOM) and questioned its threat to national security.

All these shenanigans confirm America’s new policy of nurturing domestic tech innovation and its valuable leadership status.

Broadcom, a Singapore-based company led by ethnic Chinese Malaysian Hock Tan, plans to move the company to Delaware, once approved by shareholders, as a way to skirt around the regulatory issues.

Microsoft (MSFT) and Alphabet (GOOGL) are firmly against this merger as it will bring Broadcom intimately into Apple’s (APPL) orbit. Broadcom supplies crucial chips for Apple’s iPads and iPhones.

Qualcomm will equip Microsoft’s brand-new Windows 10 laptops with Snapdragon 835 chips. AMD (AMD) and Intel (INTC) lost out on this deal, and Qualcomm and Microsoft could transform into a powerful pair.

ARM, part of the Softbank Vision Fund, is providing the architecture on which Qualcomm’s chips will be based. Naturally, Microsoft and Google view an independent operating Qualcomm as healthier for their businesses.

The demand for Qualcomm products does not stop there. Qualcomm is famous for spending heavily on R&D — higher than industry peers by a substantial margin. The R&D effort reappears in Qualcomm products, and Qualcomm charges a premium for its patent royalties in 3G and 4G devices.

The steep pricing has been a point of friction leading to numerous lawsuits such as the $975 million charged in 2015 by China’s National Development and Reform Commission (NDRC) which found that Qualcomm violated anti-trust laws.

Hock Tan has an infamous reputation as a strongman who strips company overhead to the bare bones and runs an ultra-lean ship benefitting shareholders in the short term.

CFIUS regulators have concerns with this typical private equity strategy that would strip capabilities in developing 5G technology from Qualcomm long term. 5G is the technology that will tie AI and chip companies together in the next leg up in tech growth.

Robotic and autonomous vehicle growth is dependent on this next generation of technology. Hollowing out CAPEX and crushing the R&D budget is seriously damaging to Qualcomm’s vision and hampers America’s crusade to be the undisputed torchbearer in revolutionary technology.

CFIUS’s review of Broadcom and Qualcomm is a warning shot to China. Since Lattice Semiconductor (LSCC) and Moneygram (MGI) were out of the hands of foreign buyers, China now must find a new way to acquire the expertise to compete with America.

Only China has the cash hoard to take a stand against American competition. Europe has been overrun by American FANGs and is solidified by the first mover advantage.

Shielding Qualcomm from competition empowers the chip industry and enriches Qualcomm’s profile. Chips are crucial to the hyper-accelerating growth needed to stay at the top of the food chain.

Implicitly sheltering Qualcomm as too important to the system is an ink-drenched stamp of approval from the American government. Chip companies now have obtained insulation along with the mighty FANGs. This comes on the heels of Goldman Sachs (GS) reporting a lack of industry supply for DRAM chips, causing exorbitant pricing and pushing up semiconductor companies’ shares.

All the defensive posturing has forced the White House to reveal its cards to Beijing. The unmitigated support displayed by CFIUS is extremely bullish for semiconductor companies and has been entrenched under the stock price.

It is likely the hostile takeover will flounder, and Hock Tan will attempt another round of showmanship after Broadcom relocates to Delaware as an official American company paying American corporate tax. After all, Tan did graduate from MIT and is an American citizen.

The chip companies are going through another intense round of consolidation as AMD (AMD) was the subject of another takeover rumor which lifted the stock. AMD is the only major competitor with NVIDIA (NVDA) in the GPU segment.

The cash repatriation has created liquid buyers with a limited amount of quality chip companies. Qualcomm is a firm buy, and investors can thank Broadcom for showing the world the supreme value of Qualcomm and how integral this chip stalwart is to America’s economic system.

May 14, 2019

Tech Letter

Mad Hedge Technology Letter
May 14, 2019
Fiat Lux

Featured Trade:

(CHINA’S COUNTERATTACK)
(AAPL), (MSFT), (ADBE), (PYPL), (QCOM), (MU), (JD), (BABA), (BIDU)

May 14, 2019

Diary, Newsletter, Summary

Global Market Comments
May 14, 2019
Fiat Lux

Featured Trade:

(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT)

China's Counterattack

Tech Letter

Ratcheting up the trade tensions, China is pulling the trigger on retaliatory tariffs on $60 billion worth of U.S. goods, just days after the American administration said it would levy higher tariffs on $200 billion in Chinese goods.

American President Donald Trump accused China of reneging on a “great deal.”

The mushrooming friction between the two superpowers gives even more credence to my premise that hardware stocks should be avoided like the plague.

I have stood out on my perch in 2019 and proclaimed to buy software stocks and if you need one name to hide out in then I would confidently choose Microsoft (MSFT).

Microsoft has little exposure to China and will be rewarded the most on a relative basis.

The last place you want to get caught out is buying hardware stocks exposed to China and Apple is quickly turning into the largest piece of collateral damage along with airplane manufacturer Boeing.

Remember that 20% of Apple’s revenue comes from China and Apple bet big to solidify a complex supply chain through Foxconn Technology Group in China.

When history is recorded, CEO of Apple Tim Cook not hedging his bets exposing Apple’s revenue machine could go down as one of the worst ever managerial decisions by tech management.

The forced intellectual property transfers in China from western corporations was the worst kept secret in corporate America.

Being an operational guru as he is, and the hordes of data that Apple have access to, this was a no brainer and Cook should have mitigated his risks by investing in a supply chain that was partially outside of China, and not incrementally spreading out the supply chain through other parts of Asia is coming back to bite him.

China's most recent tariffs will come into effect on June 1, adding up to 25% to the cost of U.S. goods that are covered by the new policy from China's State Council Customs Tariff Commission.

The result of these newly minted tariffs is that importers will probably elect to avoid absorbing the costs themselves and pass the price hikes to the consumer sapping demand.

The American consumer still retains its place as the holy grail of the American economic bull case, but this will test the thesis.

For the short term, it would be foolish to hang out to Chinese companies listed in New York through American depository receipts (ADR) such as JD.com (JD), Alibaba (BABA).

Baidu (BIDU) is a company that I am flat out bearish on because of a weakening strategic position versus Alibaba and Tencent in China.

Even with no trade war, I would tell investors to short Baidu, and the chart is nothing short of disgusting.

Wei Jianguo, a former vice-minister at the Chinese Ministry of Commerce who handled foreign trade, said to the South China Morning Post that “China will not only act as a kung fu master in response to U.S. tricks but also as an experienced boxer and can deliver a deadly punch at the end.”

It is clear that any goodwill between the two heavyweight powers has evaporated and the hardliners inside the communist party pulled all the levers possible to back out at the last second.

Many of us do not understand, but there is a complicated political game perpetuating inside the Chinese communist party pitting reformists against staunch traditionalists.

This is not only Chairman Xi’s decision and appearing weak on the global stage is the last concession the communist government will subscribe to.

Along with the iPhone company, semiconductor stocks will be ones to avoid.

The list starts out with the chip companies leveraged the most to Chinese revenue as a proportion of total sales including Qualcomm (QCOM) with 65% of revenue in China, Micron (MU) who has 57% of sales in China, Qorvo who has half of sales from China, Broadcom who has 48% of sales from China, and Texas Instruments rounding out the list with 43% of total revenue from China.

The first 5 months of the year saw constant chatter that the two sides would kiss and makeup and chip stocks benefitted from that tsunami of positive momentum.

The picture isn’t as pretty when you flip the script, and chip stocks could suffer a gut-wrenching summer if the two sides drift further apart.

After Microsoft, other software names I would take comfort in with the added bonus of strong balance sheets are Veeva Systems (VEEV), PayPal (PYPL), and Adobe (ADBE).

The new tariffs will burden American households to up to $2 billion per month going forward, and new purchases for discretionary items like extra electronics will be put on the back burner extending the refresh cycle and saddling chip companies and Apple with a glut of iPhone and chip inventory.

Buy software companies on the dip.

May 8, 2019

Tech Letter

Mad Hedge Technology Letter
May 8, 2019
Fiat Lux

Featured Trade:

(ELBOWED OUT OF THE WAY BY APPLE)
(SPOT), (AAPL)

May 7, 2019

Diary, Newsletter, Summary

Global Market Comments
May 7, 2019
Fiat Lux

Featured Trade:
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL)
(THE CODER BOOM)

May 6, 2019

Diary, Newsletter, Summary

Global Market Comments
May 6, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE’S ANOTHER BOMBSHELL),
(DIS), (QQQ), (AAPL), (INTU), (GOOGL), (LYFT), (UBER), (FCX))

The Market Outlook for the Week Ahead, or Here’s Another Bombshell

Diary, Newsletter

I was all ready to write this week that massive monetary stimulus created by the Federal Reserve will cause the stock market to continue its slow-motion melt up.

The president had other ideas.

As of this writing, the US will impose without warning a surprise 25% increase in tariffs on $200 billion worth of Chinese imports, effective Friday, or in four days.

Clearly, the trade negotiations are not going as well as advertised by the administration. My bet is that the stock market won’t like this. All I can say is that I’m glad I’m 90% in cash and 10% in a Walt Disney vertical bull call spread that expires in nine trading days.

The bigger and unanswerable question is whether this is just a negotiating strategy already well known by the Bronx Housing Authority that sets up a nice dip to buy? Or is it this the beginning of a long overdue summer correction?

Nobody knows.

Certainly, the rally was getting long in the tooth, rising almost every day in 2019, with NASDAQ reaching new all-time highs. Those who kept their big-cap technology stock through the sturm und drang of the December meltdown have been rewarded handsomely. Index players reigned supreme.

However, we live in unprecedented times. Never before has a stock market received this much artificial stimulus at an all-time high unless you hark back to the Tokyo 1989 top. Japanese shares are now trading at 43% lower than that high….30 years later. We all know that our own decade-old bull market will eventually end in tears, but will it be in days, weeks, months, or years?

I had plenty of great wisdom, wonderful sector selections, colorful witticisms, and killer stock picks to serve up to you this week, but they have all be outrun by events. There’s nothing to do now but wait and see how the market responds to this tariff bombshell at the Monday morning opening.

After three months of decidedly mixed data, the information flow on the economy suddenly swung decidedly to the positive. The jobs data could have been more positive.

Of course, the April Nonfarm Payroll Report was a sight to behold. It came in at 263,000, about 80,000 more than expected, and more than makes up for last month’s dismal showing. It was a bull’s dream come true. This is what overheating looks like fueled by massive borrowing. Play now, pay later.

The headline Unemployment Rate fell a hefty 0.2% to 3.6%, the most since 1969 when the Vietnam War was raging, and the economy was booming. I remember then that Levi Strauss (LEVI) was suffering from a denim shortage then because so much was being sent to Southeast Asia to use as waterproof tarps. Wages rose 3.2% YOY.

Professional and Business Services led at a massive 76,000 jobs, Construction by 33,000 jobs, and Health Care by 27,000 jobs. Retail lost 12,000 jobs.

The ADP came in at a hot 275,000 as the private hiring binge continues. Then the April Nonfarm Payroll Report blew it away at 263,000. The headline unemployment rate plunged to a new 49-year low at 3.6%.

Consumer Spending hit a decade high, up 0.9% in March while inflation barely moved. Is Goldilocks about to become a senior citizen?

Apple (AAPL) blew it away with a major earnings upside surprise. The services play is finally feeding into profits. Stock buybacks were bumped up from $100 billion to $150 billion. Don’t touch (AAPL) up here with the stock just short of an all-time high. How high will the shares be when Apple’s revenue split between hardware and software revenues is 50/50?

Pending Home Sales jumped 3.8% on a signed contract basis. No doubt the market is responding to the biggest drop on mortgage rates in a decade. At one point, the 30-year fixed rate loan fell as low as 4.03%. Avoid housing for now, it’s still in a recession.

Topping it all off, the Fed made no move on interest rates. Like this was going to be a surprise? This may be the mantra for the rest of 2019. The big revelation that the Fed will start ending quantitative tightening now and not wait until September, as indicated earlier. More rocket fuel for the stock market. Let the bubble continue.

Uber (UBER) hit the Road for its IPO with valuations being cut daily, from a high of $120 billion to a recent low of $90 billion. The issue goes public on Friday morning. Rival Lyft (LYFT) definitely peed on their parade with their ill-fated IPO plunging 33%.

It wasn’t all Champaign and roses. San Francisco home prices fell for the first time in seven years. The median price is now only $830,000, down 0.1% YOY. Back up the truck! Clearly a victim of the Trump tax bill, this market won’t recover until deductions for taxes are restored. That may take place in two years….or never!

The Mad Hedge Fund Trader suffered a modest setback with the sudden collapse of copper prices last week, thus giving up all its profit in Freeport McMoRan (FCX). Global Trading Dispatch closed the week up 14.48% year to date and is down -1.48% so far in May. My trailing one-year retreated to +18.85%.

Reflecting the huge sector divergence in the market, the Mad Hedge Technology Letter leaped to another new all-time high on the back of two new very short-term positions in Intuit (INTU) and Google (GOOG), which we picked up after the earnings debacle there. Some 11 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.

My nine and a half year profit shrank to +314.62%. The average annualized return backed off to +33.11%. With the markets at all-time highs and my Mad Hedge Market Timing Index forming a 2 ½ month high, I am now 90% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.

The coming week will be pretty boring after last week’s excitement, at least on the hard data front.

On Monday, May 6, Occidental Petroleum (OXY), now engaged in a ferocious takeover battle for Anadarko, reports. So does (AIG).

On Tuesday, May 7, 3:00 PM EST, we obtain March Consumer Credit. (LYFT), one of the worst performing IPOs this year, gives its first ever earnings report.

On Wednesday, May 8 at 2:00 PM, we get the most important earnings report of the week with Walt Disney (DIS), along with (ROKU).

On Thursday, May 9 at 8:30 the Weekly Jobless Claims are produced. At the same time, we get the March Producer Price Index. Dropbox (DBX) reports.

On Friday, May 10 at 8:30 AM, we get the Consumer Price Index. The Baker-Hughes Rig Count follows at 1:00 PM. (UBER)’s IPO will be priced at the opening. Viacom (VIA) Reports.

As for me, I’ll be watching the Kentucky Derby on Saturday. The field is wide open, now that the favorite, Omaha Beach, has been scratched.

As I will be attending the Las Vegas SALT conference during the coming week, the Woodstock of hedge fund managers, I will take the opportunity to rerun some of my oldies but goodies. We also have recently enjoyed a large number of new subscribers so I will be publishing several basic training pieces.

Maybe it was something I said?

For more on the SALT conference, please click here (you must be logged in to your account to access this piece).

Good luck and good trading.

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

May 3, 2019

Diary, Newsletter, Summary

Global Market Comments
May 3, 2019
Fiat Lux

Featured Trade:
(LAST CHANCE TO ATTEND THE LAS VEGAS MAY 9 GLOBAL STRATEGY LUNCHEON)
(APRIL 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (LYFT), (TSLA), (TLT), (XLV), (UBER),
(AAPL), (AMZN), (MSFT), (EDIT), (SGMO), (CLLS)

May 1 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 1 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Your old target for the (SPY) was $292.80; we’re clearly above that now. What’s your new target and how long will it take to get there?

A: My new target on the S&P 500 (SPY) is $296.80. You’re looking at $295 on the (SPY), so we’re almost there. However, we’re grinding up too slowly so I can’t give you an exact date.

Q: Will Fed governor Jay Powell give in to pressure from Trump who wants him to drop rates? Does he have any sway over the process?

A: Officially he has no sway, but every day Trump is tweeting: “I want QE back, I want a 1% rate cut.” And if that happened, the economy would completely blow up—an interest rate cut with the market at an all-time high and 3.25% GDP growth rate would be unprecedented, would deliver a short term gain and long term disaster.

Q: What do you think about the Uber (UBER) IPO?

A: I wouldn’t touch it with a 10-foot pole—they’ve been cutting valuations almost every day. At one point they were going to value the company at $120 billion dollars, now they’re at $90 billion and they may even lower it from there. The last car sharing IPO (LYFT) dropped 33% from its high. I would stay away from all of the IPOs once they’re listed. The rule is: only buy these things when they’re down 50%. Warren Buffet never buys IPOs, nor do I.

Q: What do you think about buying or selling Lyft?

A: I would wait a couple of months for Lyft to find its true price. Then you’ll have something to trade against.

Q: Do you think the bad news is over on Tesla (TSLA)? Is it time to buy? Or is it going bankrupt?

A: The whole world knew that the electric car subsidy would be cut in January, so what customers did was accelerate their orders in the 4th quarter, which took us all the way up to $380 in the shares, and then created a vacuum in the Q1 of this year. It reported the first quarter last week—they were disastrous orders, and the company is cutting back overhead as fast as possible as if it’s going into a recession, which it kind of is. The question is whether or not sales will bounce back in Q2 with the smaller subsidy. I happen to think they will. But we may not see 2018 Q4 sales levels again until 2019 Q4.

Q: Why has healthcare (XLV) been so awful this year?

A: There’s an election next year and both parties promise to beat up on the healthcare industry with drug control pricing and other forms of regulation. Of course, the current president promised free competition in drug prices; but then he moved to Washington DC and found the drug industry lobby, and nothing was ever heard again on that front. It’s a very high political risk sector, but there is some great value at these levels in the healthcare industry in the long term. I’m about to start the Mad Hedge Biotech and Health Care newsletter imminently.

Q: Should I buy the (TLT) $120-$123 call spread now?

A: That's a very aggressive trade, I would wait and go with strikes for in the money, and then only on a big dip. Don’t reach for a trade when the market is at an all-time high.

Q: Should I be shorting Tesla down here?

A: Absolutely not, your short trade was at $380, $350, $330 and $300. Down here, you run the risk of a surprise tweet from Elon Musk causing the stock to go $50 against you. Buy the way, he’s already announced that he’s buying $10 million worth of shares in his next capital raise.

Q: What do you think about CRISPR stocks long term, like Editas Medicine (EDIT), Sangamo Life Sciences (SGMO), and Cellectis (CLLS)?

A: These are probably the best bunch of 10 baggers long term. Short term they are afflicted with the same problems impacting all of healthcare—promises of regulation and price control on all of their products ahead of an election. So, hold for the long term; short term I’d only be buying the really big dips. Did I mention that I’m about to start the Mad Hedge Biotech and Health Care newsletter imminently?

Q: Is your May 10th market top forecast still good?

A: Well we’re getting kind of close to May 10th. I made this prediction based on an inverting yield curve two years ago. However, that target did not anticipate interest rates topping out for the 10-year US Treasury bond at 3.25%. Nor did it consider the Fed canceling all interest rate hikes for the year. Without the artificial stimulus, the market would certainly have already rolled over and died. That said, I still have a week to go.

Q: Should I be selling my long term holds in the FANGS, like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT)?

A: For the long term, no. However, we know from December that these things can get hit with a 40% drawdown at any time. As long as you can handle that, they always bounce back.

Q: What will happen to Venezuela? Any trades?

A: The only related trades would be in the oil market (USO). If we get a coup d’ etat which installs a new pro-American president, which could be at any time, that could lead to a selloff in oil for a couple of days as 1 Million barrels of crude per day come back on the market, but probably no more than that.

Q: With current national debt and budget deficits, when will interest in gold kick in?

A: Very simple: when the stock market goes down, you want to buy gold. It’s the hedge that everyone will chase after, and inflation is just around the corner.

Q: Do you need me to place any Kentucky Derby bets?

A: Me being the cautious guy I am, I pick the horse with the best odds and then I bet him to show. That almost always works.

Q: What about pot stocks?

A: I’ve never liked them very much; after all, how hard is it to grow a weed? The barriers to entry are zero. All of these pot companies coming up now are not really pot stocks as much as they are marketing companies, so you’re buying their distribution capability primarily. That said, I’m having breakfast with the CEO of a major pot company next week, so I’ll be writing about that once I get the inside scoop.

Q: Will the Fed be the non-event?

A: Yes, as stated in the Mad Hedge Hot Tips this morning, it will be a non-event and the news is due out in about an hour.

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