Mad Hedge Technology Letter
November 30, 2020
Fiat Lux
Featured Trade:
(THE GREEN LIGHT FOR E-COMMERCE)
(AMZN), (W), (OSTK), (WMT), (TGT), (MELI), (EBAY), (CRM), (ADBE)
Tag Archive for: (AMZN)
Data from Adobe Analytics is in and it suggests that e-commerce is delivering on its expected domination over retail.
I can’t ignore the helping hand of the pandemic which has deemed pedestrian shopping malls too dangerous to set foot in and for analog businesses that survive, it is essentially coming down to whether a digital footprint has been developed or not.
There is only so much a PPP loan can do to paper over the cracks of a non-digital business.
At some point, CEOs will need to wake up and understand that survival means a migration to digital.
Forecasts show that Black Friday online sales will register between $8.9 billion and $10.6 billion, which represents growth of up to 42% year over year.
The data firm expects Black Friday and Cyber Monday to become the two largest online sales days in history as consumers shift more spending toward e-commerce amid the public health crisis.
By last Friday morning, Salesforce projected online sales in the U.S. for Black Friday to spike 15% to $11.9 billion.
The truth is that many shoppers got their shopping done even before Thursday and Friday with digital sales in the U.S. spiking 72% year over year on Tuesday and were up 48% on Wednesday.
E-commerce companies front-ran the actual holidays to eke out more profit in the anticipation of competitors offering earlier sales.
According to Adobe, Thanksgiving sales hit a record $5.1 billion, up 21.5% over 2019 and this aggressive growth rate can be considered the new normal.
Smartphones continued to account for an increasing segment of online sales, with this year’s $3.6 billion up 25.3%, while alternative deliveries — a sign of the e-commerce space maturing — also continued to grow, with in-store and curbside pickup up 52% on 2019.
Shopify said that over 70% of its sales are being made using smartphones.
What are the hot gift items?
Electronics, tech, toys, and sports goods being the most popular categories — at the right price will help retailers continue to experience elevated sales volume.
Adobe said a survey of consumers found that 41% said they would start shopping earlier this year than previous years due to much earlier discounts.
This season is headed for record-breaking levels as consumers power online sales for both holiday gifts and necessities.
Not all big-box retailers were open over the holidays and getting that extra surge from the likes of daily needs such as paper towels, cleaning products, and garbage bags has boosted the top-line growth as well.
We have seen the perfect storm of elements fuse together to help the bottom line records of the likes we have never observed.
Comps will be difficult to beat next year if the vaccine solution starts coming online by next winter and considering that the worst economic damage is behind us.
Next year, the U.S. consumer will have more to spend setting up a tough but possible beat to next year’s numbers along with the high likelihood that tech stocks will experience another leg up.
There will be a lot happening in between, such as a new U.S. administration that is primed for a different economic polic; but it’s impossible not to love the narrative of certain e-commerce companies such as Shopify (SHOP), MercadoLibre (MELI), Target (TGT), Walmart (WMT), Etsy (ETSY), Wayfair (W), eBay (EBAY), Overstock.com (OSTK), Amazon (AMZN) and the companies that measure their data like Salesforce (CRM) and Adobe (ADBE).
If we ever could anoint when a year became the year of technology, then this would be it in 2020.
The base case for next year is that the borders and states will still grapple with the virus and the knock-on effects to society, economy, and politics as the capacity to produce the virus won’t meet demand for at least a year.
Tech stocks are primed to outperform non-tech next year and even though multiples are high, the momentum suggests that this group of stocks will be the gift that keeps giving as the Fed has offered generous liquidity conditions to tech investors.
Mad Hedge Technology Letter
November 23, 2020
Fiat Lux
Featured Trade:
(COMMUNICATIONS HAS NEVER BEEN MORE IMPORTANT)
(TWLO), (TWTR), (CRM), (SQ), (AMZN), (OSTK), (W)
Growth is not dead as last week’s tech rally shows that tech stocks still have their allure.
One tech growth stock that I am absolutely in-love with is communications-as-a-platform cloud stock Twilio who services Airbnb and Uber as the software that connects the users to their staff.
The ability to communicate with customers in real time has never been more urgent in a fast-paced world, especially in the software-centric economy.
From food delivery to booking hotels, from customer service to password resets, literally anything revolves around the ability to connect reliably and rapidly.
Many people in 2020 still do not even know what Twilio (TWLO) does!
They are the dark horse cloud company that nobody has heard of.
The company provides the software building blocks that lets developers embed Twilio's communication technology in their apps, messaging systems, emails, and more. It also streamlines the process so it can be accomplished in a matter of hours, rather than weeks or months.
Here’s an insanely applicable example: The update you received from Lyft regarding your ride, the text messages and reservation confirmation you got from Airbnb, the customer service interactions with Disney's Hulu, and the booking confirmation from your restaurant via Yelp? These were delivered by Twilio's technology.
In pandemic third quarter, Twilio's revenue climbed 52% year over year, while also avoiding a loss, swinging from a loss in the prior-year quarter.
The company reported 208,000 active customers, up 24% year over year.
There is no mistake that these types of cloud stocks are in the vein of Twitter (TWTR), Salesforce (CRM), Square (SQ), and so on and at the vanguard of the hullabaloo of growth stocks.
Why are growth stocks so popular?
Growth stocks are companies that increase their revenue and earnings faster than average.
A growth company relentlessly develops an innovative product or service or at the top of the pack of fastest-growing industries and unsurprisingly that is technology, and that fact won’t change for generations.
Firms growing faster than average for long periods tend to be rewarded by the market, and this is why there has been a massive migration to growth stocks that has enriched shareholders of Apple (APPL), Facebook (FB), Netflix (NFLX), and so on.
Growth also begets additional growth and the faster they grow, the bigger the returns can be.
They are also more expensive than the average stock in terms of metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios, but investors look past this in an age of expanding liquidity which is the catalyst that breathes even more momentum into these stocks.
US growth stocks secure a premium just for the possibility they will fulfill their parabolic growth potential.
Capitalizing on powerful long-term trends can grow their sales and profits for many years, and the following are a list of seminal trends that all involve technology data points as the secret sauce.
- E-commerce: The massive migration to online shopping is here to stay and the coronavirus has acted like a supercharger to e-commerce company like Amazon (AMZN), Overstock (OSTK), and Wayfair (W).
- Digital advertising: The digital ad market is moving marketing budgets from TV and print to online channels.
- Digital payments: Contactless payments and fintech (through a smartphone) will eventually replace physical card transactions.
- Cloud computing: Computing power is migrating from on-premise data centers to cloud-based servers. Amazon’s (AMZN) and Alibaba’s (BABA) cloud infrastructure services help make this possible, while Salesforce.com (CRM) provides some of the best cloud-based software available.
- Cord-cutting and streaming entertainment: Millions of people are only paying for internet services that offer on-demand content and provide access to premium packages. This trend has been supercharged by the Millennial generation.
These powerful trends will last decades giving you plenty of time to claim your share of the profits they create.
Rank growth companies with strong competitive advantages. Otherwise, their business might fail.
Some competitive advantages are:
- Network effects: Facebook is a valid example that built its usership by offering other assets like WhatsApp and Instagram to snowball into a 2 billion number usership. The synergies are plentiful with the ability to cross-sell its products across platforms and aggregating data to deploy the intel in the best way it can make money.
- Scale advantages: Size can be another powerful advantage. Amazon is a great example here, as its massive global fulfillment network is something its smaller rivals will find extremely difficult to replicate.
- High switching costs: Switching costs are expenses and difficulties involved in switching to a rival product or service. Once a company begins to use e-commerce company Shopify as the core of its online operations, they are unlikely to absorb the burden of switching to another competitor.
Pinpointing large addressable markets means a larger opportunity to secure higher revenue and Twilio is occupying a spot at the intersection of generational, long-term trends and almost unfair competitive advantages.
The underlying shares have rocketed this year as communications has never been more important. This is a great buy and hold stock for the long term because trading short term is difficult with its elevated volatility.
When I was a kid, radios were built with vacuum tubes.
I remember my dad taking me to the supermarket where a large display case sporting dozens of sockets identified the tube you needed.
All you had to do then was install it without electrocuting yourself.
Then transistors were invented and everything changed overnight. Suddenly, solid-state electronics took over the market. Everything was lighter, cheaper, and much faster.
A decade later, Intel took over the computer market launching its revolutionary 4004 microprocessor.
It looks like I am going to live long enough to see another great leap forward in computing power.
Imagine a single computer that was so powerful that its processing power exceeded that of all the other computers in the world combined.
Applied to the stock market, such a machine would be able to algorithmically extract hundreds of billions of profits without anyone noticing.
It would be able to break any code in the world in seconds, rendering all security programs useless.
It would also act as an adrenaline shot for all of the artificial intelligence efforts currently out there.
Oh, and to understand how to interpret its output, we will have to invent a new form of advanced high mathematics.
You may be forgiven for thinking I spent my weekend reading science fiction.
But you would be wrong.
I actually got to see a working prototype for such a machine known as a quantum computer at the NASA Ames Research Center in nearby Mountain View, California.
Dominated by an enormous wooden airship hangar once owned by the Navy, the facility is home to a joint venture between NASA and Google to develop the next generation of supercomputers.
The machine was built by D-Wave, a small Canadian start-up in Burnaby, a suburb of Vancouver, Canada. It was founded in 1999 by a former wrestler, Geordie Rose and Haig Farris.
To understand how such a breakthrough is possible, it is necessary for me to explain some basic particle physics.
Classical computers operate through a system of silicon gates that allow electrons to pass through or not. This is expressed in computer code as a 0, a 1, or nothing at all, known as “bits.”
And yes, I am old enough to have programmed simple computers with only 0’s and 1’s.
The problem is that this technology, launched during the 1960s, is reaching its theoretical limits.
According to Moore’s law, the number of circuits squeezed on a microprocessor doubles every two years until 2015. A few ingenious tweaks and modifications by manufacturers have extended that deadline by five years to 2020.
After that, a Great Depression was supposed to hit, as all progress in technology ground to a halt.
Enter quantum computing.
Instead of only two possible choices in each code entry, the number of possible solutions becomes infinite for quantum computing.
It does this by changing the physical statue of electrons for each piece of code. Some electrons spin clockwise, others counterclockwise, while others still spin on a northeast-southwest axis, and so on.
As a result, the number of calculations that can be performed by a quantum algorithm increased exponentially, as does its speed.
The computational unit of a quantum computer is called a “quantum bit,” or “qubit.”
The machine I saw has 1,000 qubits, powered by two chips containing 500 niobium loops each, and was code-named “Washington.”
The quantum computer I saw doesn’t look anything like a computer. Instead, it looks like a small walk-in freezer.
That is essentially what it is, as 90% of the hardware is devoted to dissipating heat and shielding it from electromagnetic and magnetic interference.
There is no silicon involved in this computer. Instead, the chips are made of hundreds of 2-micron-wide threads of Niobium, a rare earth, cooled at close to absolute zero.
Gold-plated copper disks are used as heat sinks.
The next-generation quantum computer is expected to have chips made out of aluminum.
The quantum code is now so fragile that the mere presence of matter can erase it and convert it into a useless classical computer.
Its speed is measured through a process known by “entanglement” whereby distant atoms display the mirror image of nearby ones.
And now we’re over my pay grade, and probably yours too.
For that reason, its output can only be transmitted through fiber optic cable.
D-Wave is not alone in its efforts at quantum computing. Do any search on the term, and the number of research institutions involved runs into the hundreds. And who knows what is going on in China and Russia?
D-Wave is a private company. Its largest investors include venture capital firm Draper Fisher Jurvetson, Amazon’s Jeff Bezos, and In-Q-Tel, the venture capital arm of the CIA.
It is possible that D-Wave may never see the light of day as a public company in which you and I can invest. Instead, its total production may be reserved for its original investors.
However, you can invest directly into those shareholders most likely to benefit, including Amazon (AMZN) and Alphabet (GOOG).
There are other models for advanced supercomputing underway that may also reach economic viability, such as DNA-based computing. I’ll be covering those in a future letter.
One of the many goals of the Diary of a Mad Hedge Fund Trader is to discover advanced technologies early, and then get out in front of them with trading recommendations.
Ever wonder why Amazon shares have tripled this year?
This might be the reason.
To learn more about D-Wave and its amazing technology, please click here.
Global Market Comments
October 30, 2020
Fiat Lux
Featured Trade:
(OCTOBER 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (VIX), (AMZN), (TSLA), (FEYE), (HACK), (PANW), (V), (TLT), (FXA), (FXC), (ZM), (DOCU), (RTX), (LMT), (NOC), (GD)
Below please find subscribers’ Q&A for the October 28 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Do you think if Trump contests the election, it will be bad for stocks?
A: Yes, count on that knocking another 10% off of stocks. The market has spent the last six months pricing in a Biden win. Take that away and you have to price that back out again, about 6,000 Dow Average points (INDU). We’ve already dropped 2,500 points so that leaves another 3,500 points of downside t0 go in the event of a Trump win.
Q: Will that result in a crash?
A: Yes. At least 1,000 points in the overnight session following.
Q: Do you think it’s going to happen?
A: No. According to the polls, Trump will lose by at least 15 million votes. While the polls missed the Electoral College result last time, they were dead on with the popular vote, with Hillary Clinton winning by 3 million votes. If the margin were only a few hundred or thousand votes in a single battleground state, Trump might win a court fight. But he can’t win if the margin is in ten states and tens of millions of votes. That is too much to fudge. That is how markets react: they hate surprises, and a second Trump win would be the surprise of the century.
Q: With all of the earnings positive, do you think markets will stay positive?
A: Earnings aren’t important right now. Everyone knew earnings would be great because we were coming off of hundred-year lows caused by the pandemic. So yes, we knew they’d be up 50%, 100%, 150%; that's not the surprise. The bigger issue is what the pandemic is going to do, and of course, only biochemists know that—most stock traders have no idea, which is reflected in these gigantic swings we’re seeing in the market both on the upside and the downside. As a biochemist, I can tell you that this is our final wave that's coming up and it could last several months. After that, we get a vaccine or herd immunity. When it's done, you have the bull market of a lifetime—up 400% in ten years from these levels. Dow 120,000 here we come!
Q: Do you see a tax selloff if Biden gets in? Should we get short?
A: Definitely; there will be a tax selloff. Past ones have only lasted a week or two and those were the last two weeks of December, so it really won’t be that bad. It’s not like it’s a surprise that Biden is ahead in the polls, because he has been for 6 months. Nor is it a surprise that he is going to raise taxes on the wealthy. I wouldn’t get short though. The short play was last week and the week before; and I did manage to get out three shorts but didn't want to get too big in front of an election. So those all worked. I'm out of all of them now, and now we’re looking only at long plays. And with the Volatility Index (VIX) over $40, you can go 20% or 30% in-the-money on these call spreads and still look to make 10%-20% profit on the position in a month.
Q: Isn’t the pandemic great for Amazon (AMZN)?
A: Yes, Amazon was taking over the world anyway, and forcing everyone to an online-only economy which couldn’t be better for them. A lot of this shifting is permanent and won’t be going back to the way it was before the pandemic with brick and mortar shops and malls. So yes, we love Amazon and I would buy on the dips. There’s a double from here.
Q: Do you have long term names I can buy to sit on?
A: Yes, we actually do have a long-term portfolio posted on the website. It would be listed under your subscription area once you log in—we rebalance that twice a year. And of course, we had a 10% holding in Tesla (TSLA) which went up ten times, so the performance of the long-term portfolio is through the roof. To find the long-term portfolio, please click here.
Q: Do you record this webinar?
A: Yes, we post it on the www.madhedgefundtrader.com site in two hours.
Q: Do you still like the Internet security stocks like FireEye (FEYE)?
A: Yes. Hacking is growing faster than the Internet itself. You should also look at Palo Alto Networks (PANW) and the ETF (HACK).
Q: Should we hold on to the Visa (V) spread hoping it will come back after the election drop?
A: Hope is not an investment strategy. I always stop out of positions when they hit a 2% loss. The only time I have 4% losses is when we get these gigantic gap moves overnight, which tend to happen once every one or two years. In this case, Visa got hit with a surprise antitrust suit from the Department of Justice that knocked $10 off of the stock. So no, I will not hold on to it in the hope that it does better; I will try to minimize my losses, get out, and get into the next winning position. Hope is what turns a 4% loss into a complete 10% write off.
Q: What’s your view on the Canadian dollar (FXC)?
A: I like it, but it’s not as good as the Australian dollar (FXA) because Canada has a major oil exposure, and actually the worst kind of oil exposure—tar sands in northern Alberta. The outlook for oil is poor and that will be a drag on the currency in the form of fewer exports. Buy the (FXA). No oil troubles here. Kangaroos are another story.
Q: Will you be looking to sell short on the United States Treasury Bond Fund (TLT)?
A: Yes, if we can just get a little bit higher. We’re looking at an economic recovery next year, so we’d expect the (TLT) to be lower by at least $20 points in 2021.
Q: Do you think the San Francisco and New York housing markets will return to what they were before with so many people are moving out of the city?
A: Yes, they will come back, I’ve been through many of these cycles in San Francisco over the past 50 years; it always comes back. Once the pandemic is over, people will say, “Oh my gosh, I can’t believe you can get a two-bedroom apartment in San Francisco for only $2 million.” That's probably another year or two off after a vaccine is in widespread distribution.
Q: Is real estate in a bubble?
A: Absolutely, but real estate bubbles can go on for a long time, like ten years. The bubble in Australia has been going on for 30 years. Ultimately, real estate prices are driven by the earnings power of the local economy which, in the case of San Francisco, is huge. This time around, we have a record large millennial generation looking for real estate. There are 85 million millennia buyers with only 65 million Gen X-er’s selling homes. So, we have to make up a shortfall of 20 million houses at some point. That’s why building permits are through the roof every month.
Q: Zoom (ZM) and DocuSign (DOCU) are the darling stocks of COVID 2020—what do you think about them at these high prices?
A: Very high risk. If you bought these a year ago when we first started covering them, good for you as they're up ten times. However, there are better fish to fry than chasing these big pandemic winners at all-time highs.
Q: If Biden wins, what happens to defense stocks like Raytheon Technology (RTX)?
A: They go down. It turns out a lot of the defense business is in very long term contracts that can’t be broken. They have to supply so many planes a year to the government for a decade or more. However, the sentiment on these sectors sours under democratic administrations because they are not initiating new weapons systems where the big money is made. Lockheed Martin (LMT), Northrop Grumman (NOC), and General Dynamics (GD) all have the same problem. I grew up with these companies. They were the FANGs of their day.
Q: How does a Biden win affect Tesla (TSLA)?
A: Then $2,500 a share for Tesla looks cheap (it’s now at $410). Biden will do everything he can to slow climate change and accelerate alternative energy. Tesla is front and center on that. Under current law, car manufacturers are limited on the number of units they can sell to get the $7,500 tax break per vehicle. Tesla used up all their subsidies five years ago. My bet is that the limits will be eliminated and that leads to a huge surge in Tesla sales in the U.S., which is why the stock has gone up 10 times in the last year. Tesla has promised to drop their car price to $25,000 in three years. If you throw in $10,000 in federal and state tax subsidies you get the car for free. Then you can write off General Motors (GM) and Ford (F).
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Bear Sighting
Global Market Comments
October 23, 2020
Fiat Lux
Featured Trade:
(11 SURPRISES THAT WOULD DESTROY THIS MARKET),
(SPY), (USO), (AMZN), (MCD), (WMT), (TGT)
Note to readers: Sorry for the short letter today but PG&E is about to turn off my electric power to reduce the risk of a wildfire during these high, hot winds from the east so I’m sending you just a few quick thoughts.
The Teflon market is back.
Bad news is good news. Good news is good news.
What could be better than that?
However, there are a few issues out there lurking on the horizon that could pee on everyone’s parade.
Risks of an asymmetric outcome right now are huge. Let me call out the roster for you.
1) The China Trade War Escalates – Every day economic advisor Larry Kudlow tells us that the trade talks are progressing nicely, and every day the administration pulls the rug out from under him with new sanctions. The last chance to avoid the next recession is upon us. A trade deal is the rational thing to do. Oops! There's that “rational” word again.
2) Economic Data Gets Worse - After a great data run into the fall, they are suddenly rolling over. All of the forward-looking data is now 100% terrible.
3) The Fed Raises Interest Rates- This has been the world’s greatest guessing game for the past three years. Jay Powell has just promised NOT to raise interest rates for three years, so an increase would be completely out of the blue and have an outsize impact. The Fed lives in perpetual fear of the American economy going into the next recession with interest rates near zero! That would leave them powerless to do anything to engineer a revival.
3) Another Geopolitical Crisis - You could always get a surprise on the international front. But the lesson of this bull market is that traders and investors could care less about North Korea, ISIS, Al Qaida, Afghanistan, Iraq, Syria, Russia, the Ukraine, or the Chinese expansion in the South China Sea.
Every one of these black swans has been a buying opportunity of the first order, and they will continue to be so. At the end of the day, terrorists don’t impact American corporate earnings, nor do they own stocks.
4) A Recovery in Oil – The next drone attack against Saudi Arabia could send oil really flying. If it recovers too fast and rockets back to the $100 level, it could start to eat into stock prices, especially big energy-consuming ones, like transportation and industrials.
5) The End of US QE - The Fed’s $4.5 billion quantitative easing, relaunched in March, could end as soon as it gets the sense that the economy is recovering too fast. That would take the punch bowl away from the party. Anyone who said QE didn’t work obviously doesn’t own stocks.
6) A New War – If the US gets dragged into a major new ground war, in Iran, North Korea, Syria, Iraq, or elsewhere, you can kiss this bull market goodbye. Budget deficits would explode, the dollar would collapse, and there would be a massive exodus out of all risk assets, especially stocks.
7) US Corporate Earnings Collapse – They already have for the sectors of the economy where you can’t socially distance, like movie theaters, restaurants, and airlines. A much higher third wave of Covid-19 would do the trick nicely, bringing a new round of lockdowns. Do you think stocks (SPY) will notice?
8) Another Emerging Market (EEM) Crash - If the greenback resumes its long-term rise, another emerging market debt crisis is in the cards. Venezuela and Argentina are just the opening scenes.
When their local currencies collapse, it has the effect of doubling the principal balance of their loans and doubling the monthly payments, immediately.
This is the problem that is currently taking apart the Brazilian economy right now. It happened in 1998, and it looks like we are seeing a replay.
9) A Trump Victory – Since the stock market has spent the last six months discounting a Biden win, the opposite result would be a total out of the blue shock. Count on a 10% dive in the (SPY) immediately, and 20% eventually. Polls can be wrong. Who knew?
10) Inflation Returns – Steep tariff increases on everything Chinese is rapidly feeding into rising US consumer prices. What do you think the Amazon (AMZN) wage hike to $15 means? If McDonald’s (MCD), Walmart (WMT), and Target (TGT) join them, we’re there. This is a stock market preeminently NOT prepared for a return of inflation.
I know you already have trouble sleeping at night. The above should make your insomnia problem much worse.
Try a 10-mile hike with a heavy pack every night in the mountains. It works for me.
Down the Ambien, and full speed ahead!
A Threat to Your Portfolio?
Mad Hedge Technology Letter
October 21, 2020
Fiat Lux
Featured Trade:
(WILL ANTITRUST PROBLEMS UNLEASH GOOGLE?)
(GOOGL), (AMZN), (FB), (AAPL)
