Posts

August 23, 2019

Global Market Comments
August 23, 2019
Fiat Lux

Featured Trade:

(AUGUST 21 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXB), (NVDA), (MU), (LRCX), (AMD),
 (WFC), (JPM), (BIDU), (GE), (TLT), (BA)

July 3, 2019

Mad Hedge Technology Letter
July 3, 2019
Fiat Lux

Featured Trade:

(CHIPS ARE BACK FROM THE DEAD)
(XLNX), (HUAWEI), (AAPL), (AMD), (TXN), (QCOM), (ADI), (NVDA), (INTC)

Chips are Back from the Dead

The overwhelming victors of the G20 were the semiconductor companies who have been lumped into the middle of the U.S. and China trade war.

Nothing substantial was agreed at the Osaka event except a small wrinkle allowing American companies to sell certain chips to Huawei on a limited basis for the time being.

As expected, these few words set off an avalanche of risk on sentiment in the broader market along with allowing chip companies to get rid of built-up inventory as the red sea parted.

Tech companies that apply chip stocks to products involved with value added China sales were also rewarded handsomely.

Apple (AAPL) rose almost 4% on this news and many investors believe the market cannot sustain this rally unless Apple isn’t taken along for the ride.

Stepping back and looking at the bigger picture is needed to digest this one-off event.

On one hand, Huawei sales comprise a massive portion of sales, even up to 50% in Nvidia’s case, but on the other hand, it is the heart and soul of China Inc. hellbent on developing One Belt One Road (OBOR) which is its political and economic vehicle to dominate foreign technology using Huawei, infrastructure markets, and foreign sales of its manufactured products.

Ironically enough, Huawei was created because of exactly that – national security.

China anointed it part of the national security apparatus critical to the health and economy of the Chinese communist party and showered it with generous loans starting from the 1980s.

China still needs about 10 years to figure out how to make better chips than the Americans and if this happens, American chip sales will dry up like a puddle in the Saharan desert.

Considering the background of this complicated issue, American chip companies risk being nationalized because they are following the Chinese communist route of applying the national security tag on this vital sector.

Huawei is effectively dumping products on other markets because private companies cannot compete on any price points against entire states.

This was how Huawei scored their first major tech infrastructure contract in Sweden in 2009 even though Sweden has Ericsson in their backyard.

We were all naïve then, to say the least.

Huawei can afford to take the long view with an Amazon-like market share grab strategy because of possessing the largest population in the world, the biggest market, and backed by the state.

Even more tactically critical is this new development crushes the effectiveness of passive investing.

Before the trade war commenced, the low-hanging fruit were the FANGs.

Buying Google, Amazon, Apple, Netflix, and Facebook were great trades until they weren’t.

Things are different now.

Riding on the coattails of an economic recovery from the 2008 housing crisis, this group of companies could do no wrong with our own economy flooded with cheap money from the Fed.

Well, not anymore.

We are entering into a phase where active investors have tremendous opportunities to exploit market inefficiencies.

Get this correct and the world is your oyster.

Get this wrong, like celebrity investors such as John Paulson, who called the 2008 housing crisis, then your hedge fund will convert to a family office and squeeze out the extra profit through safe fixed income bets.

This is another way to say being put out to pasture in the financial world.

My point being, big cap tech isn’t going up in a straight line anymore.

Investors will need to be more tactically cautious shifting between names that are bullish in the period of time they can be bullish while escaping dreadful selloffs that are pertinent in this stage of the late cycle.

In short, as the trade winds blow each way, strategies must pivot on a dime.

Geopolitical events prompted market participants to buy semis on the dips until something materially changes.

This is the trade today but might be gone with one Tweet.

If you want to reduce your beta, then buy the semiconductor chip iShares PHLX Semiconductor ETF (SOXX).

I will double down in saying that no American chip company will ever commit one more incremental cent of capital in mainland China.

That ship has sailed, and the transition will whipsaw markets because of the uncertainty in earnings.

The rerouting of capital expenditure to lesser-known Asian countries will deliver control of business models back to the corporation’s management and that is how free market capitalism likes it.

Furthermore, the lifting of the ban does not include all components, and this could be a maneuver to deliver more face-saving window-dressing for Chairman Xi.

In reality, there is still an effective ban because technically all chip components could be regarded as connected to the national security interests of the U.S.

Bullish traders are chomping at the bit to see how these narrow exemptions on non-sensitive technologies will lead to a greater rapprochement that could include the removal of all new tariffs imposed since last summer.

The risk that more tariffs are levied is also high as well.

I put the odds of removing tariffs at 30% and I wouldn’t be surprised if the administration doubles down on China to claim a foreign policy victory leading up to the 2020 election which could be the catalyst to more tariffs.

It’s difficult to decode if U.S. President Trump’s statements carry any real weight in real time.

The bottom line is the American government now controls the mechanism to when, how, and the volume of chip sales to Huawei and that is a dangerous game for investors to play if you plan on owning chip stocks that sell to Huawei.

Artificial intelligence or 5G applications chips are the most waterlogged and aren’t and will never be on the table for export.

This means that a variety of companies pulled into the dragnet zone are Intel (INTC), Nvidia (NVDA), and Analog Devices (ADI) as companies that will be deemed vital to national security.

These companies all performed admirably in the market following the news, but that could be short lived.

Other major logjams include Broadcom’s future revenue which is in jeopardy because of a heavy reliance on Huawei as a dominant customer for its networking and storage products.

Rounding out the chip sector, other names with short-term bullish price action are Qualcomm (QCOM) up 2.3%, Texas Instruments (TXN) up 2.6%, and Advanced Micro Devices (AMD) up 3.9%.

(AMD) is a stock I told attendees at the Mad Hedge Lake Tahoe conference to buy at $18 and is now above $31.

Xilinix (XLNX) is another integral 5G company in the mix that has their fortunes tied to this Huawei mess.

Investors must take advantage of this short-term détente with a risk on, buy the dip trade in the semi space and be ready to rip the cord on the first scent of blood.

That is the market we have right now.

If you can’t handle this environment when there is blood in the streets, then stay on the sidelines until there is another market sweet spot.

 

May 15, 2019

Global Market Comments
May 15, 2019
Fiat Lux

(SPECIAL CHINA ISSUE)

Featured Trade:

(WHY CHINA IS DRIVING UP THE VALUE OF YOUR TECH STOCKS)
(QCOM), (AVGO), (AMD), (MSFT), (GOOGL), (AAPL), (INTC), (LSCC)

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.

 

 

 

 

February 22, 2019

Global Market Comments
February 22, 2019
Fiat Lux

Featured Trade:

(FEBRUARY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (MU), (AMD), (LRCX), (GLD), (FXE), (FXB), (AMZN),
(PLAY IT SAFE WITH ANTHEM), (ANTM), (CI)

February 20 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: If there is a China trade deal, should I buy China stocks, specifically Alibaba?

A: To a large extent, both Chinese and US stocks have already fully discounted a China trade deal, so buying up here could be very risky. The administration has been letting out a leak a day to support the stock market, so I don’t think there will be much juice left when the announcement is actually made. The current high levels of US stocks make everything risky.

Q: Is it time to buy NVIDIA (NVDA)?

A: The word I’m hearing from the industry is that you don’t want to buy the semiconductor stocks until the summer when they start discounting the recovery after the next recession (which is probably a year off from this coming summer). The same is true for Micron Technology (MU), Advanced Micro Devices (AMD), and Lam Research (LRCX).

However, if you’re willing to take some heat in order to own a stock that’s going to triple over the next three years, then you should buy it now. If you’re a long-term investor, these are the entry points you die for. Looking at the charts it looks like it is ready to take off.

Q: Should I be shorting the euro (FXE), with the German economy going into recession?

A: No. We’re at a low for the euro so it’s a bad time to start a short. It’s interest rates that drive the euro more than economies. With the U.S. not raising interest rates for six months, maybe a year, and maybe forever, you probably want to be buying the currencies more than selling them down here.

Q: Would you buy the British pound (FXB) on Brexit fears?

A: I would; my theory all along has been that Brexit will fail and the pound will return to pre-Brexit levels—30% higher than where we are at now. I have always thought that the current government doesn’t believe in Brexit one iota and are therefore executing it as incompetently as possible.

They have done a wonderful job, missing one deadline after the next. In the end, Britain will hold another election and vote to stay in Europe. This will be hugely positive for Europe and would end the recession there.

Q: What do we need to do for the market to retest the highs?

A: China trade deal would do it in a heartbeat. If this happens, we will get the 5% move to the upside initially. Then we’re looking at a double top risk for the entire 10-year bull market. That’s when the short players will start to come in big time. You’d be insane to new positions in stocks here. There is an easy 4,500 Dow points to the downside, and maybe more.

Q: Do you think earnings growth will come in at 5%, or are they looking to be zero or negative?

A: Zero is looking pretty good. We know companies like to guide conservative then surprise to the upside; however, with Europe and China slowing down dramatically, that could very well drag the U.S. into recession and our earnings growth into negative numbers. The capital investment figures have been falling for three months now. US Durable Goods fell by 1.2% in January.

This explains why companies have no faith in the American economy for the rest of this year. This was a big reason why Amazon (AMZN) abandoned their New York headquarters plans. They see the economic data before we do and don’t want to expand going into a recession.

Q: When will rising government debt start to hurt the economy?

A: It already is. Foreign investors have been pulling their bids for fear of a falling US dollar. They have also become big buyers of gold (GLD) in order to avoid anything American, so we have a new bull market there. In the end, the biggest hit is with business confidence.

Nothing good ever comes from exploding US deficits and companies are not inclined to invest going into that. That is a major factor behind the sudden deterioration in virtually all data points over the past month.

Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

February 21, 2019

Mad Hedge Technology Letter
February 21, 2019
Fiat Lux

Featured Trade:

(BUY AMD ON THE DIP),
(AMD), (NVDA), (INTC),

Buy AMD on the Dip

I am bullish Advanced Micro Devices (AMD).

The company is doing backflips and edging around other fertile pastures to the dismay of competitors.

They jumped all over Intel’s (INTC) CPU lead promising more cores and adding on more features to lure in a new audience.

In terms of computer graphics, Nvidia (NVDA) still wields more clout in the higher-grade GPU space and AMD has been playing second fiddle with cheaper, value-oriented GPU cards that can be best described as mid-range.

That is about to change.

AMD is at it again acing its attempt to pull down Goliath with its new Radeon VII.

This $700 GPU card is the first 7 nanometer (nm) GPU on the market and is a warning shot to Nvidia who they plan to surgically invade in order to snatch market share.

This new AMD GPU is a direct threat to Nvidia’s set of RTX 2080 graphics cards and is set at the same price point with comparable performance.

The Radeon VII is the next iteration to AMD’s Vega 64 and possesses similar architecture with specific enhancements in clock speeds and VRAM.

Gamers are still on the fence to whether this new product can eclipse the heavily entrenched Nvidia graphics cards that are time-honored, tested and stamped with the industries seal of approval.

It is still uncertain whether AMD can introduce the necessary supply and if you still remember when the prior iteration Vega 64 debuted in 2017, it was a threat to Nvidia’s top-tier GTX 1080, but ran out of inventory quickly.

The new Radeon VII card is one of the best on the market for professional work and still does well in the gaming realm, albeit with a lack of ray tracing.

Few video games support ray tracing currently but new game studios plan to adopt this cutting edge technology later this year.

I commend AMD’s first foray into this part of the niche market and when AMD upgrades its architecture and improves on the next iteration, Nvidia will be squarely in their crosshairs.

The number of new products that drive top-line growth is another reason to be positive on this stock.

Looking at the CPU market – momentum would be the key word to describe AMD’s current trajectory.

For generations, Intel has had a secure stranglehold on this rapidly expanding market, but the fringes of the industry have been hijacked by AMD and they seek to spread its tentacles deeper into foreign CPU waters.

By the end of the year, I believe that AMD will carve out a nice high single digit market share of global CPU sales.

Intel has been bogged down by production setbacks in the deployment of the 10-nm server chip giving AMD a chance to take advantage of this gaping pothole to jack up sales with its EPYC chip.

Not only that, AMD is motoring ahead with a superior 7-nm chip which is a faster processor and is more energy-friendly than Intel’s 10-nm version.

I can conclude that AMD is blowing past Intel in chip technology, and has its third generation of CPUs earmarked for the market in the summer ready to stretch the lead.

CEO of AMD Dr. Lisa Su is compounding the misery for Intel, offering a physical glimpse of plans to roll out its third generation Ryzen CPUs for PCs by the middle of the year at the Consumer Electronics Show in January.

Another catalyst that could drive the stock higher is a favorable earnings outlook in 2019.

After meeting expectations last quarter, expansion is expected in the high single digits in a tough chip environment that has wrought its fair share of carnage.

I wouldn’t pigeonhole the new product line as mere hype, it’s clear they are meaningfully enhanced and improved with each successive iteration.

I estimate that these new products will give AMD solid traction to close in on the competition in the CPU and GPU markets.

Clearly, this isn’t a 1-quarter venture, but visibly aware that AMD is making inroads into other markets are a demonstrably net negative to weight on Intel and Nvidia shares.

This part of tech is not without its headaches and is fraught with China risk.

Chinese gaming regulators have put the kibosh on new gaming licenses and AMD’s scaling back of forecasts should reflect this development.

Intel cited falling spend on server chips and Nvidia came out with a dreadful earnings report to forget lately.

However, when there is blood in the streets, the status quo is ripe for some change and I am confident that AMD can execute this aggressive ramp up after digesting some of the excessive inventory in the first quarter.

As AMD trades at $24, I can’t help but believe this name will end the year higher.

Investors must remember that in the near term, the Fed has hit the pause button aiding the equity market, and China has reportedly been keen on some massive chip purchases to help soothe the nerves of the administration.

If the market can marry this up with favorable reviews of AMD’s latest products, I don’t see why AMD can’t be trading at $30 by the end of the year.

At the Mad Hedge Lake Tahoe Conference, I proclaimed that AMD was one of my favorites going into 2019 and exploded upwards from $17 in October 2018.

AMD truly has not disappointed.

 

 

 

 

February 8, 2019

Global Market Comments
February 8, 2019
Fiat Lux

Featured Trade:

(FEBRUARY 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (FXA), (NVDA), (SPY), (IEUR),
 (VIX), (UUP), (FXE), (AMD), (MU), (SOYB)