(AMD) Archives

What’s Behind the NVIDIA Meltdown

Great company – lousy time to be this great company.

That is the least I can say for GPU chip company Nvidia (NVDA) who issued a cataclysmic earnings alert figuring it was better to spill the negative news now to start the healing process earlier.

This stock is a great long-term hold because they are the best of breed in an industry fueled by a secular tailwind in GPUs.

But this doesn’t mean they will be gifted any freebies in the short term and, sad to say, they have been dragged, kicking and screaming, into the heart of the trade skirmish along with Apple (AAPL) and buddy Intel (INTC) amongst others.

The best thing a tech company can have going for them right now is to have no China exposure, that is why I am bullish on software companies such as PayPal, Twilio, and Microsoft.

I called the chip disaster back in summer of 2018 recommending to stay away like the plague.

The climate has worsened since then and like I recently said – don’t buy the dead cat bounce in chips because the bad news isn’t baked into the story yet or at least not fully baked.

It’s actually a blessing in disguise if banned in China if you are firms such as Facebook (FB), Google (GOOGL), and Amazon (AMZN).

I recently noted that a material end to this trade war could be decades away and the tech world is already being reconfigured around the monopoly board as we speak with this in mind.

Where do things stand?

The US administration took a scalp when Chinese communist backed DRAM chip maker Fujian Jinhua effectively shuttered its doors.

Victory in a minor battle will likely embolden the US administration into continuing its aggressive stance if it is working.

If you forgot who Fujian Jinhua was… they are the Chinese chip company who were indicted by the U.S. Justice Department for stealing intellectual property (IP) from Boise-based chip behemoth Micron (MU).

The way they allegedly stole the information was by poaching Taiwanese chip engineers who would divulge the secrets to the Chinese company buttressing China in pursuing their hellbent goal of being able to domestically supply enough quality chips in order to stop buying American chips in the future.

Officially, China hopes to ramp up its self-sufficiency ratio in the semiconductor industry to at least 70% by 2025 which dovetails nicely with the broader goal of Chinese tech hegemony.

Fujian Jinhua was classified as a strategically important firm to the Chinese state and knocking the wind out of their sails will have a reverberating effect around the Chinese tech sector and will deter Taiwanese chip engineers to act as a go-between.

According to a research note by Zhongtai Securities, Jinhua’s new plant was expected to have flooded the market with 60,000 chips per month and generate annual revenue of $1.2 billion directly competing with Micron with their own technology borrowed from Micron themselves.

Jinhua’s overall goal was to support a monthly manufacturing target of 240,000 chips spoiling Chinese tech companies with a healthy new stream of state-subsidized allotment of chips needed to keep costs down and build the gadgets and gizmos of the future.

For the most part, it was unforeseen that the US administration had the gall and calculative nous to combat the nurtured Chinese state tech sector.

However, I will say, it makes sense to pick off the Chinese tech space now before they stop needing American chips at all in 5-7 years and when all remnants of leverage disappear.

The short-term pain will be felt in the American chip tech sector which is evident with the horrid news Nvidia reported and the aftermath seen in the price action of the stock.

Nvidia expects top line revenue to shrink by $500 million or half a billion – it’s been a while since I saw such a massive cut in forecasts.

Half of revenue comes from the Middle Kingdom and expect huge downgrades from Apple on its earnings report too.

If this didn’t scare you, what will?

These short-term headwinds are worth it to the American tech sector as a whole.

To eventually ward off a future existential crisis when Chinese GPU companies start offering outside business actionable high quality chips curated with borrowed technology, funded by artificially low debt, and for half the price is worth its weight in gold.

The same story is playing out with Huawei around the globe but at the largest scale possible.

This is what happens when the foreign tech sector is up against companies who have access to unlimited state loans and is part of wider communist state policy to take over foundational technology globally.

I will also emphasize that the Chinese communist party has a seat on every board at any notable Chinese tech company influencing decisions at the top even more than the upper management.

If upper management stopped paying heed to the communist voice at the table, they would be out of business in a jiffy.

Therefore, Huawei founder Ren Zhengfei standing at a podium promulgating a scenario where Huawei is operating freely from the government is what dreams are made of.

It’s not a prognosis rooted in reality.

The communist party are overlords breathing down the neck of Huawei after any material decisions that can affect the company and subsequently the government’s position in the interconnected world.

The China blue print essentially entails a pan-Amazon strategy emphasizing large volume – low cost strategy.

Amazon was successful because investors would throw money at the company until it scaled up and wiped the competition away in one fell swoop.

Amazon is on a destructive path bludgeoning every American second-tier mall reshaping the economic world.

The unintended consequences have been profound with the ultimate spoils falling at the feet of CEO and Founder of Amazon Jeff Bezos, his phalanx of employees as well as Amazon stockholders which are mostly comprised of wealthy investors.

Well, Chairman Xi Jinping and the Chinese communist party are attempting to Amazon the American tech sector and the broader American economy.

The American economy could potentially become the second-tier mall in this analogy and the game playing out is an existential crisis for the likes of Advanced Micro Devices (AMD), Nvidia, Micron, Intel and the who’s who of semiconductor chips.

If stocks reacted on a 30-year timeframe, Nvidia would be up 15% today instead of reaching a trading day nadir of 17%.

What is happening behind the scenes?

American tech companies are moving supply chains or planning to move supply chains out of China.

This is an epochal manifestation of the larger trade war and a decisive development in the eyes of the American administration.

In fact, many industry analysts understand a logjam of failed trade solutions as a bonus to the Chinese.

However, I would argue the complete opposite.

Yes, the Chinese are waiting out the current administration to deal with a new one that might be more lenient.

But that will take another two years and publicly listed companies grappling with the performance of quarterly earnings don’t have two years like the Chinese communist party.

And who knows, the next administration might even seize the baton from the current administration and clamp down even more.

Be careful what you wish for.

Taiwanese company and biggest iPhone assembler Foxconn Technology Group is discussing plans to move production away from China to India.

India is a democratic country, the biggest democracy in Asia, and is a staunch ally of the United States.

CEOs of Google (GOOGL) and Microsoft (MSFT), some of Silicon Valley heavyweights, are from India and American tech companies have been making generational tech investments in India recently.

Warren Buffet even invested $300 million in an Indian FinTech company Paytm.

When you read stories about India being the new China, well it’s happening faster than anyone thought and on a scale that nobody thought, and the underlying catalyst is the overarching trade war fueling this quick migration.

Apple is already constructing low grade iPhones in India in the state of Karnataka since 2017, and these were the first iPhones made in India.

They won’t be the last either.

Wistron, major Taiwanese original design manufacturer, has since started producing the iPhone 6S model there as well.

And it is no surprise that China and its artificially priced smartphones have undercut Samsung and Apple in India grabbing the market share lead.

This is happening all over the emerging world.

And don’t forget if U.S. President Donald Trump revisits banning American chip companies supply channels to Chinese telecom company ZTE. That would be 70,000 Chinese jobs out the window in a nanosecond.

The current administration has drier powder than you think and this would hasten the deceleration of the Chinese economy and also move forward the American recession into 2019 boding negative for tech shares.

Therefore, I would recommend balancing out a trading portfolio with overweights and underweights because it is obvious that tech stocks won’t be coupled to a gondola trajectory to the peak of the summit this year.

It’s a stockpickers market this year with visible losers and winners.

And if China does get their way in the tech war, American chip companies will eventually become worthless squeezed out by mainland competition brought down by their own technology full circle.

They are first on the chopping board because their overreliance on Chinese revenue streams for the bulk of sales.

Among these companies that could go bust are Broadcom (AVGO), Qualcomm (QCOM), Qorvo (QRVO), Skyworks Solutions (SWKS) and as you expected Micron and Nvidia who are one of the main protagonists in this story.

January 28, 2019

Tech Letter

Mad Hedge Technology Letter
January 28, 2019
Fiat Lux

Featured Trade:

(BUY DIPS IN SEMIS, NOT TOPS),
(XLNX), (LRCX), (AMD), (TXN), (NVDA), (INTC), (SOXX), (SMH), (MU), (QQQ)

January 28, 2019

Diary, Newsletter, Summary

Global Market Comments
January 28, 2019
Fiat Lux

Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or IT’S FINALLY OVER)
(SPY), (TLT), (FXE), (MSFT), (AAPL),
(PG), (F), (LRCX), (AMD), (XLNX)

The Market Outlook for the Week Ahead, or It’s Finally Over

Diary, Newsletter

Last week, I was too busy to cook dinner for my brood, so I ordered a pizza delivery. When an older man showed up with our dinner, I told the kids to tip him double. After all, he might be an unpaid federal air traffic controller.

It is a good thing I work late on Friday afternoon because that's when the government shutdown ended after 35 days. The bad news? The government stops getting paid again in only 18 more days. If you have to travel, you better do it quick as the open window may be short.

The most valuable thing we learned from all of this is that the weak point in America is the airline transportation system which relies on 4,000 flights to get the country’s business done.

Having once owned a European air charter company, I could have told you as much was coming. Every nut, bolt, and screw that goes into a US registered aircraft has to be inspected by the federal government. They are painted yellow when viewed which is called “yellow tagging”. No inspection, no screw. No screw, no airplane. No airplane, no flight. No flight, no economy. I can’t tell you how many times I have seen a $30 million aircraft grounded by a failed 50-cent part.

And here’s what most investors don’t get. We lost 75 basis points in GDP growth from the shutdown. We may lose another 75 basis points restarting. And if you lose 1.50% from a post-Christmas period that is normally weak anyway, Q1 GDP may well come in negative. Hello recession!

We won’t know for sure until the first advanced estimate of Q1 GDP from the US Department of Commerce’s Bureau of Economic Analysis is published on April 26. That’s when the sushi will hit the fan. That, by the way, is perilously close for the May 10 prediction of the end of the entire ten-year bull market.

How did investors fare during the shutdown? We clocked the best January in 32 years with the Dow Average up 7.55%. Maybe the government should stay closed all the time!

It is not like the government shutdown, the fading Chinese trade talks, and the arrest of the president’s pal were the only things happening last week.

A slowing China is freaking out investors everywhere. Even if a trade deal is cut tomorrow, it may not be enough to pull the economy out of a downward death spiral. Look out below! A 6.6% growth rate for 2018 is the slowest in 30 years.

Existing Home Sales were down a disastrous 6.4%, in December and 10% YOY, the worst read since 2012. The government shutdown is made closings nearly impossible.

The EC’s Mario Draghi said there would be no euro rate rises until 2020 and the US bond market took off like a rocket. Another point or two and we’ll be in short selling territory again. Don’t count on Europe to pull us out of the next recession. Whoever came up with the idea of putting an Italian in charge of Europe’s finances anyway? Like that was such a great idea.

Procter & Gamble (PG) beat with an upside earnings surprise. It must be all those people buying soap to wash their hands of our political system. But Ford (F) disappointed, dragged down by weak foreign earnings. The weakest big car company to get into electric cars is really starting to suffer. The last of the buggy whip makers is taking a swan dive

The semis have bottomed in the wake of spectacular earnings reports from (LRCX), (AMD), and (XLNX). The great artificial intelligence play is back in action after a severe spanking. I never had any doubt they would come back. Now for an entry point.

Farmers are leaving crops to rot in the field as the trade war with China destroys prices and the Mexicans needed to harvest them are trapped at the border. There’s got to be an easier way to earn a living. Avoid the ags and all ag plays. Short tofu stocks!

Investors are now sitting on pins and needles wondering if we get a repeat of the horrific February of 2018, or whether so far great earnings reports will drive us to higher highs. Earnings tail off right when the next government shutdown is supposed to start so our lives will be interesting, to say the least.

My January and 2019 year to date return soared to +7.24%, boosting my trailing one-year return back up to +30.23%.

My nine-year return climbed up to +308.14%, a mere 1.72% short of a new all time high. The average annualized return revived to +33.61%.

I have been dancing in between the raindrops using rallies to take profits on longs and big dips to cover shorts.

I started out the week using the 4 1/2 point plunge in the bond market (TLT) to cover the last of my shorts there, bring in a whopper of a $1,680 profit in only 13 trading days. To quote the Terminator (whose girlfriend I once dated, the Terminatrix), I’ll be back.”

I used the big 500-point swoon in the Dow on Monday to come out of my (SPY) short at cost. An unfortunate comment on interest rates by the European Central Bank forced me to stop out of my long in the Euro (FXE), also at cost.

That has whittled my portfolio down to only two positions, a long in Microsoft (MSFT) and a short in Apple (AAPL). As a pairs trade you could probably run this position for years. I am now 80% in cash.

The goal is to go 100% into cash into the February option expiration in 14 trading days, wait for a big breakout, and then fade it. Essentially, I am waiting for the market to tell me what to do. That will enable me to bank double-digit profits for the start of 2019, the best in a decade.

The upcoming week is very iffy on the data front because of the government shutdown. Some government data may be delayed and other completely missing. Private sources will continue reporting on schedule. All of the data will be completely skewed for at least the next three months. You can count on the shutdown to dominate all media until it is over.

Jobs data will be the big events over the coming five days along with some important housing numbers. We also have several heavies reporting earnings.

On Monday, January 28 at 8:30 AM EST, we get the Chicago Fed National Activity Index.

On Tuesday, January 29, 9:00 AM EST, the Case Shiller National Home Price Index for November is released. The ever important Apple (AAPL) earnings are out after the close, along with Juniper Networks (JNPR).

On Wednesday, January 30 at 8:15 AM EST, the ADP Private Employment Report is announced. Pending Home Sales for December follows. Boeing Aircraft (BA) and Facebook (FB), and PayPal (PYPL) announce.

Thursday, January 31 at 8:30 AM EST, we get Weekly Jobless Claims. We also get the all-important Consumer Spending Index for December. Amazon (AMZN) and General Electric (GE) announce.

On Friday, February 1 at 8:30 AM EST, the January NonFarm Payroll Report hits the tape.

The Baker-Hughes Rig Count follows at 1:00 PM. Schlumberger (SLB) announces earnings. Home Sales is released. AbbVie Inc (ABBV) and DR Horton (DHI) report.

As for me, I will be celebrating my birthday. Believe me, lighting 67 candles creates a real bonfire. I received the best birthday card ever from my daughter which I have copied below

Good luck and good trading.

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

Buy Dips in Semis, Not Tops

Tech Letter

Don’t buy the dead cat bounce – that was the takeaway from a recent trading day that saw chips come alive with vigor.

Semiconductor stocks had their best day since March 2009.

The price action was nothing short of spectacular with names such as chip equipment manufacturer Lam Research (LRCX) gaining 15.7% and Texas Instruments (TXN) turning heads, up 6.91%.

The sector was washed out as the Mad Hedge Technology Letter has determined this part of tech as a no-fly zone since last summer.

When stocks get bombed out at these levels - sometimes even 60% like in Lam Research’s case, investors start to triage them into a value play and are susceptible to strong reversal days or weeks in this case.

The semi-conductor space has been that bad and tech growth has had a putrid last six months of trading.

In the short-term, broad-based tech market sentiment has turned positive with the lynchpins being an extremely oversold market because of the December meltdown and the Fed putting the kibosh on the rate-tightening plan.

Fueled by this relatively positive backdrop, tech stocks have rallied hard off their December lows, but that doesn’t mean investors should take out a bridge loan to bet the ranch on chip stocks.

Another premium example of the chip turnaround was the fortune of Xilinx (XLNX) who rocketed 18.44% in one day then followed that brilliant performance with another 4.06% jump.

A two-day performance of 22.50% stems from the underlying strength of the communication segment in the third quarter, driven by the wireless market producing growth from production of 5G and pre-5G deployments as well as some LTE upgrades.

Give credit to the company’s performance in Advanced Products which grew 51% YOY and universal growth across its end markets.

With respect to the transformation to a platform company, the 28-nanometer and 16-nanometer Zynq SoC products expanded robustly with Zynq sales growing 80% YOY led by the 16-nanometer multiprocessor systems-on-chip (MPSoC) products.

Core drivers were apparent in the application in communications, automotive, particularly Advanced Driver Assistance Systems (ADAS) as well as industrial end markets.

Zynq MPSoC revenues grew over 300% YOY.

These positive signals were just too positive to ignore.

Long term, the trade war complications threaten to corrode a substantial chunk of chip revenues at mainstay players like Intel (INTC) and Nvidia (NVDA).

Not only has the execution risk ratcheted up, but the regulatory risk of operating in China is rising higher than the nosebleed section because of the Huawei extradition case and paying costly tariffs to import back to America is a punch in the gut.

This fragility was highlighted by Intel (INTC) who brought the semiconductor story back down to earth with a mild earnings beat but laid an egg with a horrid annual 2019 forecast.

Intel telegraphed that they are slashing projections for cloud revenue and server sales.

Micron (MU) acquiesced in a similar forecast calling for a cloud hardware slowdown and bloated inventory would need to be further digested creating a lack of demand in new orders.

Then the ultimate stab through the heart - the 2019 guide was $1 billion less than initially forecasted amounting to the same level of revenue in 2018 - $73 billion in revenue and zero growth to the top line.

Making matters worse, the downdraft in guidance factored in that the backend of the year has the likelihood of outperforming to meet that flat projection of the same revenue from last year offering the bear camp fodder to dump Intel shares.

How can firms convincingly promise the back half is going to buttress its year-end performance under the drudgery of a fractious geopolitical set-up?

This screams uncertainty.

Love them or crucify them, the specific makeup of the semiconductor chip cycle entails a vulnerable boom-bust cycle that is the hallmark of the chip industry.

We are trending towards the latter stage of the bust portion of the cycle with management issuing code words such as “inventory adjustment.”

Firms will need to quickly work off this excess blubber to stoke the growth cycle again and that is what this strength in chip stocks is partly about.

Investors are front-running the shaving off of the blubber and getting in at rock bottom prices.

Amalgamate the revelation that demand is relatively healthy due to the next leg up in the technology race requiring companies to hem in adequate orders of next-gen chips for 5G, data servers, IoT products, video game consoles, autonomous vehicle technology, just to name a few.

But this demand is expected to come online in the late half of 2019 if management’s wishes come true.

To minimize unpredictable volatility in this part of tech and if you want to squeeze out the extra juice in this area, then traders can play it by going long the iShares PHLX Semiconductor ETF (SOXX) or VanEck Vectors Semiconductor ETF (SMH).

In many cases, hedge funds have made their entire annual performance in the first month of January because of this v-shaped move in chip shares.

Then there is the other long-term issue of elevated execution risks to chip companies because of an overly reliant manufacturing process in China.

If this trade war turns into a several decades affair which it is appearing more likely by the day, American chip companies will require relocating to a non-adversarial country preferably a democratic stronghold that can act as the fulcrum of a global supply chain channel moving forward.

The relocation will not occur overnight but will have to take place in tranches, and the same chip companies will be on the hook for the relocation fees and resulting capex that is tied with this commitment.

That is all benign in the short term and chip stocks have a little more to run, but on a risk reward proposition, it doesn’t make sense right now to pick up pennies in front of the steamroller.

If the Nasdaq (QQQ) retests December lows because of global growth falls off a cliff, then this mini run in chips will freeze and thawing out won’t happen in a blink of an eye either.

But if you are a long-term investor, I would recommend my favorite chip stock AMD who is actively draining CPU market share from Intel and whose innovation pipeline rivals only Nvidia.

January 10, 2019

Diary, Newsletter, Summary

Global Market Comments
January 10, 2019
Fiat Lux

Featured Trade:

(JANUARY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (UUP), (FXE), (FXY), (FXA), (AAPL), (GLD), (SLV), (FCX), (SOYB), (USO), (MU), (NVDA), (AMD), (TLT), (TBT), (BIIB), (TSLA)
(TESTIMONIAL)

January 9 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Due to technical problems, I was unable to read your questions. However, I was able to get a print out after the fact.

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 9 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.

Q: Is the bottom in for stocks?

A: It is for six months to a year. A price earnings multiple at 14X seems to be the line in the sand. The Christmas Eve massacre, which took us down to a (SPY) of $230, was the final capitulation bottom of the entire down move. We may try a few more retests of the lows on bad tweets or data points. But from here on, you’re trying to buy the dip. That’s why I cut my vacation short a week and issued eight emergency trade alerts, five for Global Trading Dispatch and three for the tech letter. By the way, I hope you appreciate those trade alerts because I had to call back staff from vacations in four different countries to get them done. But it was worth it. We’ve had the strongest start to a New Year in a decade, up 5.75%. We made back all our Q4 losses in two days!

Q: Is the strong dollar play (UUP) over? Is it time to start buying Euro (FXE) and Yen (FXE)?

A: Yes, it is. The Fed flipping from hawk to dove sounds the death knell for the dollar. With the expansion of the yield spread between the buck and other currencies stopped dead in its tracks, a massive short covering rally will drive the currencies higher. That’s why I bought the Euro on Monday for the first time in more than a year (FXE). The Japanese yen where the biggest shorts has already moved too far, up 8%. That’s where hedge fund typically finance positions because yen yields have been at zero forever.

Q: How about the Aussie (FXA)? Do we have a shot now?

A: I think so. But the bigger driver with Aussie is the trade war with China. That said, I believe that will get resolved soon too unless Trump wants to run for reelection during a recession. The Aussie also has relatively high-interest rates so it should soar.

Q: Is the government shutdown starting to hurt the economy?

A: Yes, it is. Estimates on the damage the shutdown is doing range from 0.5% to 1% a week. That means at a minimum of 20-week shut down cuts 2019 GDP growth by 1%. If your assumption for growth this year is only 2%, that brings us perilously close to a recession. However, with the big stock market rally of the past week investors clearly believe the shutdown will be over in a week. Buy “Wall” stocks.

Q: What’s the biggest risk to the market now?

A: Companies announced great earnings in October and the stocks promptly collapsed. Q4 earnings start in a few weeks, except this time, the earnings will be smaller. The big one, Apple (AAPL) is reporting on January 29 and will be especially exciting since they already announced a major disappointment. If we get a repeat, you could get another meltdown in February just like we saw last year.

Q: Do you still like gold (GLD)?

A: I did in Q4 as a hedge for a collapsing stock market. Now that stocks are on fire again, I think gold and silver (SLV) will take a rest. You’re not going to get a serious move in gold until we see higher inflation and that is a while off.

Q: Is the bear market in commodities over?

A: I think so, with a flattening interest rate picture and a weakening dollar, the entire commodity complex is looking better. That includes copper (FCX), energy (USO), and the ags (SOYB). What do you buy in an expensive market? Cheap stuff, and all of these are at seven-year lows. I think people are ready to give paper assets a rest. All we need now for these to work is inflation. My cleaning lady just asked for a raise so there’s hope.

Q: The semiconductors have just had a good move. Is it time to get in?

A: You want to buy the semis, like Micron Technology (MU), NVIDIA (NVDA), and Advanced Micro Devices (AMD) when they’ve just had a BAD move. Market conditions have improved, but not to the extent you want to buy the most volatile stocks in the market. That said, if we get another crushing move in February you might dip your toe in with some semis on capitulation day. If you want to buy semis in this environment, you might have a gambling addiction.

Q: If the Fed has stopped raising rates, are you still bearish on the (TLT) and bullish on the (TBT)?

A: I think what governor Jay Powell’s dovish comments will do is put bonds in a six-month range, say 2.45%-3.0% in yield. All of my future bond alerts will trade around those levels. In the option world, we will be setting up a short strangle, betting that interest rates don’t move out of this range for a while. In that case, our two bond positions will be OK, with the nearest money one expiring in only seven trading days.

Q: Is it too late to get into biotech (BIIB)?

A: No, along with technology, biotech will be one of the two leading sectors in the entire market for the next ten years. However, me being an eternal cheapskate, I want to get in again on a decent dip. This is the industry that will cure cancer over the next decade and that will be worth a trillion dollars in profits.

Q: You’ve kept us out of Tesla (TSLA) for a couple of years. Is it time to go back in?

A: I think I would. If production can ramp up from 7,000 to 10,000 a week, the stock should do the same. The ten-year view for this stock is that it goes from today’s $330 to $2,500. That said, this is a notorious trading stock so it is very important to buy it on a dip. Wait for the next tweet from Elon Musk.

Q: If we enter a bear market in May 2019, what would be the appropriate long-term investments at that time?

A: Nothing beats cash, especially now that you are actually getting paid something decent. You can find cash equivalents now yielding all the way up to 4%. In a bear market, stocks either go down a lot, or a whole lot, so there is nothing worth keeping. The only reason to stay in is to avoid a monster tax bill (my cost on Apple is 25 cents) or you still work for the company.

December 4, 2018

Tech Letter

Mad Hedge Technology Letter
December 4, 2018
Fiat Lux

Featured Trade:

(THE CHIP STOCKS HAVE BOTTOMED)
(NVDA), (AMD), (INTC)

The Chip Stocks Have Bottomed

Tech Letter

Now that the trade war has officially been put on ice, two short-term trades to scoop up out there for the taking would be chip leaders Advanced Micro Devices (AMD) and Nvidia (NVDA).

Even though I am still bearish on the chip sector as a whole, the mini rapprochement signals a much-needed reprieve to China-sensitive stocks that have been beaten down for most of the year.

The timing is favorable now to jump into some of the avant-garde chip stocks and succinctly two companies that have captured the imagination of the global gaming revolution by constructing the critical GPUs needed to display the mouth-watering graphics that appear life-like.

They are two dominators that have cornered the GPU market and don’t apologize for it.

Even if next year fails to pinpoint a comprehensive détente, China-based supply chains will have more time to make epochal decisions to whether risk the full brunt of a future multilateral spat or mosey on over to greener pastures to insulate themselves from tariff and political fallout.

Most of American tech supply chains are in China now, but that doesn’t mean that can’t change.

Either way, ratcheting down the tone of the jawboning will help chip stocks and the GPU mainstay firms should finish out the year resolutely.

After building an abnormally high amount of inventory due to last year's bitcoin euphoria, Nvidia got ahead of itself drowning in excess GPU units with evaporating crypto mining demand from the bitcoin crash.

It was never imagined that the crypto phenomenon could incite a build-up of inventory channels to the levels that started to erode pricing, but when you consider that two companies and not one were pumping out the GPU units, they simply overdid it.

Conveniently enough, management on both sides blamed each other.

In any case, I believe the spike in inventory says more to the crash and burn of bitcoin pricing than having something to do with these two solidly run companies.

Bitcoin revenue stream only accounted for 10% of revenue at last year’s peak of crypto ecstasy.

The Mad Hedge Technology Letter has steered wide and clear of the crypto phenomenon because even though the blockchain technology is indeed intriguing, there are probably a few more crash and burn scenarios to unfold before it becomes legitimately accepted in mainstream finance.

In any effect, GPU pricing has started to turn the corner up 15% from the September lows, and for the first time since earlier in the year, inventory levels are starting to flush itself out.

The “crypto hangover” headlines roughed up shares of the duopolists but now the light is at the end of the tunnel, and combined with the ceasefire in Washington, has created a positive platform for these two favorites to trade into yearend.

The record-breaking sales volume from Black Friday and Cyber Monday is a minor boost giving credence to the inventory channels clear-up.

Jubilant shoppers were gobbling up GPUs to dish out to gamer friends and family.

At the annual Siggraph conference in Vancouver, Canada, CEO of Nvidia Jensen Huang said, “Turing is Nvidia’s most important innovation in computer graphics in more than a decade.”

The development of real-time ray tracing is the “holy grail” of the GPU industry.

The Turing products render graphics six times faster than their predecessor Pascal-based chip.

Nvidia has rolled out three new graphics cards based on this technology.

In fact, the Turing T4 Cloud GPU has been a massive success in the data center space.

Not only is gaming benefitting from these high-end chips, they can be slotted around offering a diverse set of functionalities.

Ian Buck, Vice President and General Manager of Accelerated Computing at Nvidia said, “We have never before seen such rapid adoption of a data center processor.”

Nvidia’s T4 offers the modern cloud of today the performance and efficiency needed for compute-intensive workloads at scale.

The two companies continue to manufacture top-level GPUs that the competition cannot touch.

The headwinds facing these two titans are of a temporary basis and will eventually dry up.

Both missed on earnings and the stocks sold off badly.

The one-off short-term headwinds will quickly shore up.

The lucky opportunity for investors to get into a best of breed at a cheaper price does not come around too often.

If the near-term fluctuations provide too intense, both companies are great long-term buy and hold stocks.

The bad news has been mostly baked into the pie at this point.

The reset in expectations should factor in the evolving inventory situation and the crypto headwinds.

I fully expect both companies to convincingly beat earnings on the top and bottom line next quarter.

Core gaming demand is robust and by next earnings, the companies will be back to their normal selves – systematically crushing earnings expectations.

This one-off in performance was a curveball, and AMD is a company that I am bullish on with AMD snatching away market share from Intel (INTC).

German’s large tech e-tailer Mindfactory published a survey showing AMD doubling the number of CPUs sold leaving Intel in the dust in November.

Intel’s CPU sales are nosediving quickly because of AMD’s innovative designs and reliable production performance.

Intel has essentially gifted a huge swath of the CPU market to AMD, and AMD has embraced the change and is running with it.

I expect AMD to turn the screws next year on Intel and hoover up more of the CPU market.

Add in that 50% of AMD’s revenue comes from newly launched products and then you can start to cook up why these companies are ahead of the game.

They concoct best in show products leverage with groundbreaking technology and scale up these state-of-the-art offerings to the strongest segments of the chip industry and presto!

You have a magical recipe of success.

At the Mad Hedge Lake Tahoe Conference at the end of October, AMD plummeted to around $17 and I convincingly proclaimed this stock a buy without hesitation.

The stock is up over 25% since then to almost $24, and I believe this stock is in it for the long haul.

Summary - Tech LetterNovember 21, 2018

Tech Letter

Mad Hedge Technology Letter
November 21, 2018
Fiat Lux

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