Global Market Comments
August 6, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or FINDING A NEW GIG),
(FB), (TWTR), (INTC), (NFLX), (AAPL), (AMZN),
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Tag Archive for: (AAPL)
I'm back! Yes, I have freshly debarked from the KLM 10-hour nonstop from Amsterdam, with little gin bottles in the shape of old Dutch houses in my pockets.
And what do I do upon landing but rush to pound out another newsletter, digesting what I learned from reading a mountain of research on the way home.
Oops! It looks like I forgot how to type!
My 24-hour layover there enabled me to view the great Rembrandt masterpieces at the Rijksmuseum and explore Anne Frank's house, now part of a large museum complex. When I visited there 50 years ago you could just walk right in the front door, as there was almost no one there.
It was not a bad summer as far as losses go; a charger left behind on the Queen Mary, a hair brush in Paris, and all of my money in Zermatt, Switzerland. That last item was the result of my daughter breaking an ankle while riding a scooter down the Matterhorn.
If you are going to break something make sure you do it in Switzerland. The X-rays, MRI scans, doctors, and cast cost me only $1,000. The same would have cost me $10,000 in the U.S. But the wheelchair set me back $650. A better one could be had at home from Amazon for $115.
Still, there is no better way to breeze through customs and immigration but in a wheelchair. We avoided the long lines and saved so much time that my other daughter promised to break her ankle next year to achieve the same shortcuts.
Arriving at home in San Francisco it immediately became clear that a lot of chart formations are busted as well, especially those for Facebook (FB), Twitter (TWTR), Intel (INTC), and Netflix (NFLX). Apple (AAPL) is bumping up against my 2018 target of $220, while Amazon nearly hit my $2,000 goal.
With tech likely resting until the NEXT round of 25% earnings growth that starts in two months, we are going to have to find a new gig to earn our crust of bread. That will most likely be small caps, value plays, and multiyear laggards. Last year's big August play was in steel, gold, industrials, and commodities, which are all now getting hammered by trade wars.
Even if I had stayed at home in July trading like a one-armed paperhanger I'm not sure I would have made any money. Tech melted up, then melted down, and as we all know from hard-earned experience, the losses always cost more than the gains.
The week went out with a July Nonfarm Payroll Report that was tepid at best at 157,000. But headline unemployment stayed at 3.9%, a 17-year low. With the fifth week of gains and the (SPY) now up 6.2% in 2018 it appears that the markets only want to hear good news...for now.
Professional and Business Services were up 51,000, Manufacturing gained 37,000, while Hospitality and Leisure picked up 40,000 jobs. The bankruptcy of Toys "R" Us seems to have cost the economy 32,000 jobs. The broader U-6 "discouraged worker" unemployment rate fell to 7.5%.
Now is the golden age of the working high school dropout, the criminal background, and the DUI conviction. Many companies would rather hire former junkies that pay up for expensive college grads, which is why wage gains are still going nowhere, and perhaps, never will. Expensive retiring baby boomers replaced by cheap minimum-wage millennials is also a drag on wages.
Deflation isn't just hitting wages. It is destroying the financial industry as well, as high-paid yuppies are replaced by robots. This is the first bull market in history with no net hiring by Wall Street.
Wells Fargo no longer actually manages money, although it will readily accept your money to do so and farm it out to bots. Fidelity launched the world's first zero fee index fund, the Fidelity ZERO Total Market Index Fund (FZROX). As interest rates are now providing new income sources for managers, expect negative fee funds to come soon.
Markets are certainly climbing a wall of worry, a Great Wall. The Chinese are matching our threatened 25% tariffs on an additional $200 billion of trade with $60 billion of their own. After that retaliation will have to take indirect forms, as they have run out of tats to match our tits (oops, doesn't really work, does it?).
They might shut down the massive General Motors (GM) plants in China, where they sell more cars than in the U.S., and a LOT more Buicks. They could also interfere with the Apple assembly line. Remember, trade wars are only easy to win when you run a dictatorship. They could also continue weakening the yuan to offset the tariffs, as they have done so far. We can't retaliate there with a rising interest rate regime.
Speaking of rates, you can bet your bottom dollar that the Fed will raise them another 25 basis points to a 2.0% to 2.25% range at their upcoming September 25-26 meeting, after having passed last week. A market killing inverted yield curve is now only months away. Rising rates don't matter until they do, and then they matter A LOT!
Also, of concern is the appreciating levels of the Mad Hedge Market Timing Index, which at a nosebleed 71 is approaching seven-month highs. Buying up here never offers a good risk/reward ratio.
As I have been climbing in the Alps and out of the markets my 2018 year-to-date performance remains unchanged at an eye-popping 24.82% and my 8 1/2-year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.
This coming week will be a very boring week on the data front, which is usual after the big jobs reports of the previous week..
On Monday, August 6, there will be nothing of note to report.
On Tuesday, August 7 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.
On Wednesday, August 8 at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST the Fed is expected to raise interest rates by 25 basis points. At 2:30 PM Fed governor Jerome Powell holds a press conference.
Thursday, August 9, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.
On Friday, August 10 at 9:15 AM EST, we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, I'll be recovering from jet lag and getting back into my groove. I'll send you a Trade Alert as soon as I find a good entry point. The year-end sprint is now on.
Below look at the gigantic smoke plume rising to 40,000 feet from the massive California fires that I flew past on the way home.
Good luck and good trading.
Mad Hedge Technology Letter
August 6, 2018
Fiat Lux
Featured Trade:
(NEXT STOP IS $2 TRILLION),
(AAPL), (AMZN), (MSFT), (NFLX), (FB), (GOOGL), (TWTR), (CRM)
Another win for big tech.
Apple (AAPL) is the first company in America to have a trillion-dollar market cap and won't be the last as Amazon (AMZN) is close behind.
This also opens up the door for one of our favorite companies Microsoft (MSFT), which will shortly cross the $1 trillion threshold as well.
The milestone underscores the reliability and power of the tech sector that has propped up this entire market in 2018 as we continue the late stage cycle of the nine-year bull market.
Apple has entered into a hyper-charged expansion phase, and I will explain how this will boost shares to new heights.
The Mad Hedge Technology Letter has been hammering away on the software and services narrative since its inception.
As legacy companies are pummeled in the financial markets, the cloud has enabled a revolutionary industry catering toward annual subscriptions of all types.
Users no longer have to store gobs of data on computers. The cloud allows the data to be stored on remote data servers giving access to the information from anywhere in the world with an Internet connection.
A plethora of modern hybrid apps boosting productivity integrated with the cloud offers business a new-found way to collaborate with coworkers around this increasingly multicultural, multilingual, and globalized world.
Apple is perfectly placed to take advantage of the current technology climate and will wean itself from the image of being a hardware company.
Investors wholeheartedly approve of the conscious move to bet the farm on service and subscriptions.
After Apple's earnings came out, the stock traded up whereas in past quarters, the total sales unit was the crucial number investors hung their hat on and the stock would dip.
Apple missed iPhone total sale units registering 41.3 million compared to the expected 41.79 million units.
This slight miss in the past was enough for the stock to sell off on and instead the stock rose 3%.
This is the new Apple.
A software services company.
Investors can feel at peace that iPhone sales aren't growing. It's not that important anymore.
Apple's software and services segment pocketed $9.55 billion in revenue, a 31% jump YOY from $7.27 billion.
This has been in the making for a while as software and services has been a five-star performer for the past few quarters.
However, the performance is material now and the pace of improvement will take Apple into the next phase of hyper-growth.
This is all good news for the stock price.
Software and services revenue now comprise 17.9% of Apple's total revenue.
By year-end, this division could topple the 25% mark.
In the earnings call, Apple CEO Tim Cook was smitten with the software and services growth saying this particular revenue will double by 2020.
In the next few years, software and services will eclipse the 40% mark, all made possible inside an incredibly sticky and top-quality ecosystem.
The iPhone continues to be the best smartphone the market has to offer. If you marry the best hardware with top-quality software, this stock will chug along to higher share prices unhindered.
As the technology sector matures, the flight to quality becomes even more glaring.
The inferior platforms will be found out quickly heightening the risk of massive intraday sell-offs and revenue-depleting penalties.
Facebook and Twitter have seen 20% sell-offs hitting investors in the mouth.
These platforms have issues rooting out the nefarious elements that seek to infiltrate its operations and manipulate the platform for self-serving interests.
Apple does not have this problem. Neither does Microsoft, Amazon, Netflix (NFLX) or Salesforce (CRM), and I will explain why.
When you offer services for free such as Facebook (FB) and Twitter (TWTR) do, you get the good, bad, and ugly bombarding the system.
Even though it's free to use these platforms, Facebook and Twitter must spend to make it useable for the good forces that made these companies into tech behemoths.
Instead of rooting out these rogue elements, they turned a blind eye describing their businesses as a distribution system and were not accountable.
Then sooner or later one of the evil elements would get these companies in hot water. It happened.
Big mistake, and the chickens are coming home to roost.
The flight to quality means avoiding public tech companies that only offer free services.
You pay for what you get.
Alphabet also has seen its free model penalized twice in Europe with hefty fines, and it probably won't be the last time.
Play with fire and you get burned.
It also offers Cook the moral high road, allowing him to non-stop criticize the low-quality platform companies, mainly Facebook, because it makes the whole tech sector look bad.
The bite back against technology in 2018 is largely in part due to these low-quality free platforms manipulating user data to ring in the profits.
Amazon has been public enemy No. 1 for the Washington administration but not to the public because the loathing of Amazon is largely a personal issue.
Amazon improves the lives of customers by giving users the best prices on the planet through its comprehensive e-commerce business.
Apple now constitutes 4% of the S&P 500 index.
Investors have been waiting for Apple's Cook to sweep them off their feet with the "next big thing."
Even though nearly not as sleek and sexy as a smartphone, the software and services unit are it.
Apple doubling down on high quality that I keep mumbling about shows up in average selling price (ASP) of the iPhone, which destroyed estimates of $694, coming in at $724 per unit.
The bump in (ASP) signals the high demand for its higher-end iPhone X model over the lower-tiered premium smartphones.
The iPhone X is the best-selling iPhone model because customers want the best on the market and will pay up.
The success of the iPhone X lays the pathway for Apple to introduce an even more expensive smartphone in the future with better functionality and performance.
If Apple can continue innovating and producing the best smartphone in the world, the price increases are justified, and demand will not suffer.
Perusing through some other parts of the earnings report, cloud revenue was up 50% YOY.
Apple pay has tripled in the volume of transactions YOY surpassing the billion-transaction mark.
China revenue has stayed solid even with the mounting trade tension. I have oftentimes repeated myself in this letter that Apple is untouchable in China because it provides more than 4 million jobs to local Chinese directly and indirectly through Apple's ecosystem.
This prognosis was proved correct when Apple announced revenue in China of $9.55 billion, a spike of 19% YOY.
Even though much of Apple's supply chain remains in China, Beijing isn't going to take a hammer and smash it up risking massive social upheaval and public fallout. In many ways, Apple is an American company masquerading as a Chinese one.
As for the stock price, the explosion to more than $208 means that Apple is overbought in the short term.
If this stock dips back to $200, it would serve as a reasonable entry point into this record-breaking hyper-growth software and services company.
And with the $234 billion in cash planned to be deployed in Apple's capital reallocation plan, the biggest hurdle is the federal daily limit Apple has in buying back its own stock according to Apple CFO Luca Maestri.
Even the problems Apple has right now are great.
Apple's Path to $1 Trillion
________________________________________________________________________________________________
Quote of the Day
Mad Hedge Technology Letter
July 31, 2018
Fiat Lux
Featured Trade:
(THE BEST IN THE BUSINESS),
(AMZN), (FB), (GOOGL), (AAPL), (NVDA), (CRM)
Scale works, and Amazon (AMZN) is proving it.
Jeff Bezos' company is hyper-charging its levers and pumping out growth to the tune of $2.5 billion in net profit as of last quarter.
This is a big deal for a company that has largely been considered using the AWS engine to fund the e-commerce business.
The topline growth is mind-boggling for a company poised to seize 50% of U.S. e-commerce sales by the end of 2018, up from the current 44%.
It's truly an Amazon stock market in 2018.
The razor-thin e-commerce margins are what Amazon is most renowned for, but it's high margin divisions are creating a higher quality company.
Investors are willing to pay a higher multiple for this version of Amazon in the future.
That is a very bullish sign going forward.
Tech shares sold off last Friday because the Amazon fireworks came to an end and no other company will be able to compare with its earnings.
This is another knock off effect from Amazon existing.
Of the vaunted FANG group, only Alphabet and Amazon impressed during this crunch earnings season at a pivotal time in the market that has looked short on ideas.
FANGs are not created equal and Amazon is by far the creme de la creme of this cohort.
The AWS cloud unit and its digital advertising division are the fodder allowing Amazon to take risks elsewhere.
Amazon is the most efficient business in America. In the past quarter it experienced more fluid data centers and warehouse operations.
If you do this for as long as Amazon has, you eventually learn all the tricks to the trade.
Hyper-accelerating technology offers Amazon a new way to implement new efficiencies, non-existent even a quarter ago boosting operational margins.
AWS surged 48.9% YOY to $6.11 billion improving on 48.7% last quarter.
AWS is also comprising a larger stake of the business than before.
This quarter AWS attributed 11.5% to total revenue compared to 10.8% last year.
The topline growth is staggering for a company duking it out with Apple (AAPL) to be the first trillion-dollar company.
The narrow breadth of the nine-year bull market is becoming even narrower, raising risk levels in the short term.
AWS is expected to grow into a $42 billion business by 2020, a nice double of what it is today.
Jeff Bezos does not need to respond to the administration's digital criticism of him because he doesn't need to. Taking the high road is the solution. If he wants to say something, he can publish it through a proxy via the Washington Post, which he owns.
Amazon's digital ad business has been a revelation.
The bad news is that Alphabet (GOOGL) and Facebook (FB) have cornered the global digital ad market taking in 73%, a nice bump from the 63% in 2015.
And of the global digital ad growth, they are collecting 83% of that growth.
That hasn't stopped Amazon from taking a stab at the digital ad market itself which is the logical move with the number of eyeballs attracted to its platform.
The ad business did $2.2 billion in sales last quarter, a nice increase of 132% YOY.
Even though in its infancy, this super-charged digital ad division could eventually give Alphabet and Facebook a run for its money - another reason Facebook is trading in bear market territory.
Facebook's platform quality is far inferior than Amazon, which uses it for e-commerce rather than posting free user content.
Facebook is still pocketing tons of cash but it's growth narrative has been exhausted shown by the dismal guidance for the second half of the year.
Amazon is incrementally raising the quality of the company in all facets, evident in the topline growth and jump in profitability.
Amazon absolutely does care about the bottom line. Watch for the net profits to surge past $3 billion in the third quarter in its resurgent digital ad business.
And with the ad tech quality floating out there, Amazon will be able to invest in poaching top dogs from Facebook and Google to build this division swiftly into tens of billions of dollars in revenue per year.
It could crescendo into another AWS-esque monster.
In Q2 2017, Amazon posted total revenue of $37.96 billion. Fast forward to 2018 and revenue raced ahead to $52.9, a robust $14.94 billion improvement.
The $14.94 billion in one quarter year-over-year improvement in Amazon total revenue is more than many tech companies earn in one year including outstanding companies such as Salesforce (CRM) and Nvidia (NVDA).
It is important for tech companies to have many irons in the fire and Amazon proves this theory correct.
The competition is cutthroat to the point that large tech companies are morphing into each other then abruptly diverging.
The brilliant ideas are copied, then the next set of ideas filter in to be copied again.
Luckily, these ideas are coming from Amazon, which is one of the most innovative companies in the world with top-level management.
This all adds up to why Amazon posted its third straight profitable quarter of more than $1 billion in profits.
Prime members didn't flinch with the price increase of an annual Amazon prime subscription showing management understands the true pulse of its customers.
Under-promise and overdeliver time and time again and a customer will be stuck with you for life.
In the past, investors only bought this company for topline growth. Now, we have a different animal on our hands turning into a model company with bottom line growth flourishing.
Management has proved that strategically investing in the right businesses bear fruit.
It takes time for these businesses to develop but when they do they turn into cash cows.
Investors will take delight in seeing Amazon's brand as just a topline growth company slowly fading away.
Increasing profits offers more opportunities and funds to create new drivers as well.
Increasing profits also adds more opportunities to reallocate capital to shareholders opening up a new investor base.
The network effect is truly alive and well, and the Mad Hedge Technology Letter has routinely identified this company as the best in the tech industry.
________________________________________________________________________________________________
Quote of the Day
"Technological progress has merely provided us with more efficient means for going backwards," said British writer Aldous Huxley.
Global Market Comments
July 25, 2018
Fiat Lux
Featured Trade:
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA
CONFERENCE, OCTOBER 26-27, 2018),
(WHY YOU MISSED THE TECHNOLOGY BOOM
AND WHAT TO DO ABOUT IT NOW),
($INDU), (TLT), (GLD), (GOOGL), (FB),
(AAPL), (NVDA), (MSFT), (AMZN)
Mad Hedge Technology Letter
July 25, 2018
Fiat Lux
Featured Trade:
(PICHAI YOURSELF, EARNINGS ARE REALLY THAT GOOD),
(GOOGL), (MSFT), (AMZN), (AAPL), (TWTR), (DIS), (TGT)
Google Translate, Alphabet's (GOOGL) free, multilingual machine, foreign language translation service, translates an unimaginable143 billion words per day.
These were one of the pearls divulged in the conference call from Google's CEO Sundar Pichai.
A bump in usage coincided with the 2018 World Cup in Russia, and in the age of low-cost airfare and overpopulation, it could be Alphabet's new cash cow.
Google Translate has the potential to morph into one of the premier foreign language applications used by anyone and everyone.
Forget about the Amazon effect, the Alphabet effect could be just as pungent, albeit away from the trenches of e-commerce.
Thank goodness the application is still ad-free.
No doubt it would be inconvenient to sit through a 15 second ad while interacting with a concierge at a bed and breakfast in the South of France.
Analysts did not sound out Pichai's plans for Google Translate, but he did mention there are some monetization opportunities on the horizon.
The latest earnings report is the most recent indication that the FANGs along with Microsoft are pulling away from the rest.
The equity price action in 2018 vindicates this fact with more than 80% of the gains spread around just a few high caliber tech names.
Is this fair? No. But life isn't fair.
The too slow too late regulation that was supposed to put a cap on the vaunted FANG group has had the opposite effect, squeezing the small guy out of the picture.
The runway is all clear for the FANGs, and the only way they will be stopped is if they stop themselves or an antitrust ruling.
This all adds up to why Alphabet has been a perennial recommendation for the Mad Hedge Technology Letter.
Duopolies are few and far between and monopolies even rarer.
They are great for earnings and as the global digital ad pie grows, it falls down to Google's bottom line.
On the news of stellar earnings, Facebook shares jumped higher in aftermarket trading and powered on to trade around 5% the following day.
Expect a great earnings report from Facebook with robust ad revenue growth.
Nothing less would be a failure of epic proportions.
The migration to mobile is real and investors need to understand analysts cannot keep up with the rising year-end targets in these shares.
Alphabet had a high bar over which to pole vault, and it still managed to beat it handily.
And the $5 billion fine for bundling its in-house apps on Android fell on deaf ears.
Alphabet has $102 billion in the coffers, and $5 billion will do nothing to materially affect the company.
The cash reserves are up from $34 billion in 2010.
The market trampled on any sniff of a risk-adverse sentiment and powered into the green with the Nasdaq reaching another all-time high.
Let's not get too carried away. Alphabet's bread and butter is still its digital ad business with Alphabet CFO Ruth Porat confirming this fact saying, "One of the biggest opportunities for investment continues to be in our ads business."
Alphabet still breaks off 86% of revenue from its distinguished ad business.
"Other" is a category commingling Google Cloud, Google Play, and hardware that only comprised 13 percent of total revenue.
"Other Bets" brings up the rear with 1% of total revenue comprising Waymo, Alphabet's self-driving unit, which is an industry leader putting Tesla and Uber in their place.
Waymo plans to shortly roll out a massive commercial operation. Along with Google Translate, it could carve out a nice position in Alphabet's portfolio going forward.
The most important metric was Alphabet's total ad revenue, which it locked in at $28.1 billion, a 23.9% YOY improvement.
Aggregate paid clicks, a model in which the advertiser pays Google for a user to click an ad, has been steadily rising to 58%, up from 52% from the same time last year.
The masterful efficiency circles back to Google's ad tech team, which is by far the best in the business and has outstanding management.
The Cloud is an area that Alphabet highlights as a place for improvement.
Alphabet's cash war chest allows the company to throw hoards of cash at a problem. When mixed with brilliant management it usually works out kindly.
CFO Porat mentioned that costs were particularly higher in the quarterly head count because of large investments in cloud talent.
Google is tired of playing third fiddle to Amazon (AMZN) and Microsoft (MSFT), and views enhancing the enterprise business as imperative.
This explains Alphabet's head count surge to more than 89,000 employees, sharply higher than the 75,600 employed a year earlier.
Every FANG and high-tier tech company is spending its brains out to compete with each other.
Expanding data centers is not cheap. Neither are the people to deploy it.
Alphabet has the cash to compete with the Amazons and Apples (AAPL) of the world.
They do not have to borrow.
The potential trip wire in Alphabet's earnings report was Google's traffic acquisition cost (TAC).
Alphabet's (TAC) is described as money paid to other companies to direct user traffic to its suite of Google products.
(TAC) went up to $6.4 billion, which is 23% of Google's ad revenue but down on a relative percentage basis of 24%.
This was enough to keep investors from sounding the alarm and was welcomed by analysts.
Alphabet pulled out all the stops this quarter and the momentum is palpable.
Top-line growth from its core ad business shows no sign of slowing.
Acceptable (TAC) was the cherry on the sundae for the quarter at a time when many industry insiders thought it would be around 25% or higher.
Hardware offered less punch than before, which is what all high-quality tech companies desire.
There were no obvious weaknesses and the 34 straight quarters of 23% YOY growth is hard to top.
Google pulls in 10% of all global digital ad dollars in one business.
Other highlights were Waymo eclipsing the 8-million-mile mark of self-driving on public roads as it is the next business to come to the fore.
Google cloud is at an inflection point attempting to win over corporate management.
It has already won contracts with heavy hitters such as Twitter (TWTR) and Disney (DIS).
Pichai mentioned Target (TGT) as a key new cloud client that just signed on with Google last quarter.
More importantly, Alphabet's brilliant quarter bolsters the macroeconomic picture heavily reliant on tech earnings to usher the market through the gauntlet.
Regulation has proved irrelevant. Whatever fine they are slapped with does not change that Google reaps the benefits from its market position as one of the duopolies in the global ad business.
Alphabet has been trading from the bottom left to the upper right via a consistent channel.
Do not chase the new all-time high of $1,270. Use any weakness around the $1,100 level to initiate new positions.
Owning a company this dominant has little downside. The regulatory burden was a myth and Pichai has handled this operation beautifully.
I am bullish on Alphabet and its partner in crime Facebook.
________________________________________________________________________________________________
Quote of the Day
"Man is still the most extraordinary computer of all," said the 35th President of the United States John F. Kennedy.
Mad Hedge Technology Letter
July 23, 2018
Fiat Lux
Featured Trade:
(THE SKY IS THE LIMIT),
(NFLX), (FB), (AAPL), (MSFT), (GOOGL)
