Mad Hedge Technology Letter
May 22, 2019
Fiat Lux
Featured Trade:
(WHY YOU NEED TO CONSIDER ALIBABA)
(BABA), (AMZN)
Tag Archive for: (AMZN)
If you’re looking for a long-term trend that highlights the state of the world, then there is no other source than Alibaba (BABA), the Amazon (AMZN) of China.
I am not saying to go out and buy this e-commerce juggernaut hand over fist, but understanding the essence of Alibaba offers an insight into the technological effects that big tech companies have on the global consumer.
Alibaba and Amazon, together, and their success have had an outsized influence on central banks around the world.
Back stateside, mixed data of persistently low inflation has confounded economists in the years since the Federal Reserve first adopted its 2% inflation target after the financial crisis.
These e-commerce firms' endeavors mean that we can whittle down expenses, migrating pricing power away from the middle class while padding the pockets of a few tech shareholders.
And if you thought Amazon offers low prices, Alibaba often offers even lower price tags because of knockoffs that are blatantly hawked on their platform.
These two companies have rocked the current marketplace by jacking up supply, which in effect brings prices down with their volume-first business models.
Inflationary signals have continued to be suppressed below the Federal Reserve’s 2% target and is mostly likely to stay low into the foreseeable future.
The Fed’s concocted measure of inflation – or the “core” personal consumption expenditures index excludes the volatile categories of food and energy.
This slowed to a rate of 1.6% year-over-year in March, marking the slowest pace since January 2018.
Combine low inflation with a national unemployment rate cratering to a 49-year low in April, and economists start to sniff around attempting to understand what is truly happening.
Theoretically, a low unemployment rate generally translates into higher levels of inflation, but the inflation is being captured by tech CEOs who are offering free services or something close to it that destroys traditional pricing mechanisms.
Once ingrained economic relationships are going extinct, and the underlying relationship has mutated to the benefit of Silicon Valley.
The economic models you once learned in school are now dead and I am giving you the reasons why.
In the Federal Reserve’s most recent policy meeting, Chairman Jerome Powell attributed factors blaming lower inflation on “transitory” variables including slipping financial service fees after the stock market’s fourth-quarter slide, along with healthcare costs.
The consequence is massive with the Fed unable to aggressively raise rates while putting the kibosh on any meaningful wage growth even while the economy is growing at 4% annually.
This has given the Fed the impetus to put rates on pause this year, which is a net dovish outcome after offering a more hawkish stance last winter.
The closely watched Fed Funds Futures tool signaled markets pricing in a 75% probability that the central bank would cut rates at least once by its December meeting which could be an overzealous prediction.
Alibaba is doing its best to crush global inflation by selling over $850 billion in Gross Merchandizing Volume (GMV) last quarter.
Not only are they selling physical goods, but they hope to crash the price for storing digital data with its cloud revenue growing 84% last year dotting Europe with new data centers.
Alibaba’s core e-commerce revenue was up 51% YOY last quarter with 721 million monthly active users.
Alibaba’s monthly active user totals are twice the population size of the United States epitomizing the breadth of this business that is quickly gaining traction in parts of Europe and Russia.
And even with Silicon Valley hijacking inflation, their interests are being staunchly defended by the current American administration from the Chinese who have copied the Silicon Valley deflation model themselves.
The trade fallout could cause massive store closures in America with more malls shuttering from the extra costs of the levied tariffs giving tech even more leeway into the e-commerce game enabling them to capture more revenue.
Brick & mortar retail is incrementally struggling with less foot traffic as customers stay home and click away on Amazon, and the new 25% bump in costs of goods could be the death knell for a large segment of physical stores.
UBS issued a note projecting nearly 21,000 retail stores will close by 2026 in the U.S.
The trade war will put into question future American jobs and increase costs for consumers.
Ultimately, Silicon Valley can have their cake and eat it too boding well for future tech stocks.
The most powerful part about Silicon Valley is the speed in which they can put analog firms out of business leaving the tech wolves to scoop up the most scrumptious leftovers.
We are just scratching the surface of what Silicon Valley will deliver for its stakeholders giving the average investor a strong hint that if you don’t have skin in the tech game yet, then it’s time to join the bandwagon.
Technology will outperform every sector going forward in almost every feasible circumstance, contrast this with sectors who are burning before our eyes, and the smart investor will understand that the deflation signs of the economy are a gilded edge buy sign for the best of breed tech.
Investors should be aware long-term that Amazon and Alibaba will harvest the inflation and pocket it in terms of revenue instead of profits because of the decision to prioritize growth over profits growing so large that they will be akin to a monopoly.
In either outcome, it equates to buy and buy some more of these shares.
Mad Hedge Technology Letter
May 20, 2019
Fiat Lux
Featured Trade:
(THE BIG PLAY IN CISCO)
(CSCO), (JNPR), (ANET), (INTC), (GOOGL), (AMZN)
You can’t steal the mojo from the company that sells network software and infrastructure equipment.
Cisco (CSCO) is effectively an indirect bet on people using the internet because companies need the network infrastructure to offer all the cool and useful services that tech provides.
Technology and the services that result from it continues to be at the heart of customer strategy and now more than ever, Cisco’s market-leading portfolio and differentiated innovation are resonating with them as they transform their IT infrastructure.
Cisco is also a fabulous bet on 5G as the most recent technologies like cloud, AI, IoT, and WiFi 6 among others are developing together to revolutionize the way business operates and delivers new experiences for customers and teams.
Cisco is fundamentally changing the way customers approach their technology infrastructure to address the rising complexity in their IT environments.
They have constructed the only integrated multi-domain intent-based architecture with security at the foundation.
This is designed to allow customers to securely connect their users and devices over any network to any application.
Enterprise networks today must be optimized for agility and heightened security, leveraging cloud and wireless capabilities with the ability to extract insights from the data and security integrated throughout.
Cisco is in pole position to deliver this to customers.
Last quarter saw the launch of new platforms expanding the enterprise networking assets with the launch of subscription-based WiFi 6 access points and Catalyst 9600 campus core switches purpose-built for cloud-scale networking.
By combining automation and analytics software with a broad portfolio of switches, access points, and controllers, Cisco is creating a seamless end-to-end wireless first architecture.
With the newest Catalyst 9000 additions, Cisco has completed the most comprehensive enterprise networking portfolio upgrade in their history.
Cisco rebuilt their entire access portfolio with intent-based networking across wired and wireless.
Cisco also now have one unified operating system and policy management platform to drive simplicity and consistency across networks all enabled by a software subscription model.
In the data center, their strategy is to deliver multi-cloud architectures that bring policy and operational consistency no matter where applications or data resides by extending Application Centric Infrastructure (ACI) and offering HyperFlex to the cloud.
According to Cisco’s official website, its HyperFlex product is “a converged infrastructure system that integrates computing, networking and storage resources to increase efficiency and enable centralized management.”
Cisco’s partnerships with Amazon Web Services (AWS), Google Cloud, and Microsoft Azure are great examples of how they continue to work with web-scale providers to deliver new innovation.
Some new additions are Cisco’s cloud ACI for AWS, a service that allows customers to manage and secure applications running in a private data center or in Amazon Web Services cloud environments.
They also expanded agreements with Alphabet (GOOGL) by announcing support for their multi-cloud platform Anthos to help customers build secure applications everywhere from private data centers to public clouds with greater simplicity.
Going forward, Cisco will integrate this platform with its broad data center portfolio, including HyperFlex, ACI, SD-WAN, and Stealthwatch cloud to deliver the best multi-cloud experience.
Organic growth has surpassed 4% for five straight quarters and expanded margins and positive guidance for the current quarter will reaccelerate PE multiples, increasing as more investors buy into the strong narrative.
CEO of Cisco CEO Chuck Robbins boasted on the call that “we see very minimal impact at this point based on all the great work the teams have done, and it is absolutely baked into our guide going forward” when referring to the headwinds of the global trade war.
It’s been quite the new normal for chip firms to guide down for the rest of 2019, and Intel’s (INTC) worries are emblematic of the growing challenges facing the tech industry.
Cisco bucked the trend by issuing strong forward guidance of 4.5% to 6.5% revenue growth in its fiscal fourth quarter, and earnings of 80 cents to 82 cents per share.
In an in-house survey, Cisco found that 11% of respondents have upgraded networking infrastructure and 16% expect to do so in the next 12 months.
The “minimal impact” of the trade war indicates to investors that even with negative tech sentiment brooding around the world, Cisco’s best in class tech infrastructure still cannot be sacrificed and the migration of companies to digital directly benefits Cisco who provides the building blocks for software and hardware tech companies to develop around.
Cisco even felt bold enough to hike prices giving consternation to current customers.
Both Juniper (JNPR) and Arista (ANET), lower quality network infrastructure companies, have indicated their enterprise businesses are growing faster than the overall market and Cisco’s price hike was probably a bad time to up margins in the current frosty climate.
Even more worrying is data that suggests a general Enterprise pause in spending at a minimum and could entrap the broader tech market as many capital expenditures could be put on hold in the late economic cycle.
Keep in mind that Cisco’s Catalyst 9000 line had an abnormally strong last fourth quarter due to brisk adoption accelerating meaning comps will be hard to beat in the next earnings report.
However, these are minor bumps on the road at a time when the major narrative is running smoothly and shows no signs of stopping.
Cisco shares will continue to rise if they continue to upgrade their products and back it up with their best of breed reputation that could spur more price hikes.
Investors should wait for dips to buy in this name until there are any signs of product quality erosion which I believe will not happen in 2019.
Global Market Comments
May 14, 2019
Fiat Lux
Featured Trade:
(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT)
Global Market Comments
May 3, 2019
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE LAS VEGAS MAY 9 GLOBAL STRATEGY LUNCHEON)
(APRIL 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (LYFT), (TSLA), (TLT), (XLV), (UBER),
(AAPL), (AMZN), (MSFT), (EDIT), (SGMO), (CLLS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 1 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Your old target for the (SPY) was $292.80; we’re clearly above that now. What’s your new target and how long will it take to get there?
A: My new target on the S&P 500 (SPY) is $296.80. You’re looking at $295 on the (SPY), so we’re almost there. However, we’re grinding up too slowly so I can’t give you an exact date.
Q: Will Fed governor Jay Powell give in to pressure from Trump who wants him to drop rates? Does he have any sway over the process?
A: Officially he has no sway, but every day Trump is tweeting: “I want QE back, I want a 1% rate cut.” And if that happened, the economy would completely blow up—an interest rate cut with the market at an all-time high and 3.25% GDP growth rate would be unprecedented, would deliver a short term gain and long term disaster.
Q: What do you think about the Uber (UBER) IPO?
A: I wouldn’t touch it with a 10-foot pole—they’ve been cutting valuations almost every day. At one point they were going to value the company at $120 billion dollars, now they’re at $90 billion and they may even lower it from there. The last car sharing IPO (LYFT) dropped 33% from its high. I would stay away from all of the IPOs once they’re listed. The rule is: only buy these things when they’re down 50%. Warren Buffet never buys IPOs, nor do I.
Q: What do you think about buying or selling Lyft?
A: I would wait a couple of months for Lyft to find its true price. Then you’ll have something to trade against.
Q: Do you think the bad news is over on Tesla (TSLA)? Is it time to buy? Or is it going bankrupt?
A: The whole world knew that the electric car subsidy would be cut in January, so what customers did was accelerate their orders in the 4th quarter, which took us all the way up to $380 in the shares, and then created a vacuum in the Q1 of this year. It reported the first quarter last week—they were disastrous orders, and the company is cutting back overhead as fast as possible as if it’s going into a recession, which it kind of is. The question is whether or not sales will bounce back in Q2 with the smaller subsidy. I happen to think they will. But we may not see 2018 Q4 sales levels again until 2019 Q4.
Q: Why has healthcare (XLV) been so awful this year?
A: There’s an election next year and both parties promise to beat up on the healthcare industry with drug control pricing and other forms of regulation. Of course, the current president promised free competition in drug prices; but then he moved to Washington DC and found the drug industry lobby, and nothing was ever heard again on that front. It’s a very high political risk sector, but there is some great value at these levels in the healthcare industry in the long term. I’m about to start the Mad Hedge Biotech and Health Care newsletter imminently.
Q: Should I buy the (TLT) $120-$123 call spread now?
A: That's a very aggressive trade, I would wait and go with strikes for in the money, and then only on a big dip. Don’t reach for a trade when the market is at an all-time high.
Q: Should I be shorting Tesla down here?
A: Absolutely not, your short trade was at $380, $350, $330 and $300. Down here, you run the risk of a surprise tweet from Elon Musk causing the stock to go $50 against you. Buy the way, he’s already announced that he’s buying $10 million worth of shares in his next capital raise.
Q: What do you think about CRISPR stocks long term, like Editas Medicine (EDIT), Sangamo Life Sciences (SGMO), and Cellectis (CLLS)?
A: These are probably the best bunch of 10 baggers long term. Short term they are afflicted with the same problems impacting all of healthcare—promises of regulation and price control on all of their products ahead of an election. So, hold for the long term; short term I’d only be buying the really big dips. Did I mention that I’m about to start the Mad Hedge Biotech and Health Care newsletter imminently?
Q: Is your May 10th market top forecast still good?
A: Well we’re getting kind of close to May 10th. I made this prediction based on an inverting yield curve two years ago. However, that target did not anticipate interest rates topping out for the 10-year US Treasury bond at 3.25%. Nor did it consider the Fed canceling all interest rate hikes for the year. Without the artificial stimulus, the market would certainly have already rolled over and died. That said, I still have a week to go.
Q: Should I be selling my long term holds in the FANGS, like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT)?
A: For the long term, no. However, we know from December that these things can get hit with a 40% drawdown at any time. As long as you can handle that, they always bounce back.
Q: What will happen to Venezuela? Any trades?
A: The only related trades would be in the oil market (USO). If we get a coup d’ etat which installs a new pro-American president, which could be at any time, that could lead to a selloff in oil for a couple of days as 1 Million barrels of crude per day come back on the market, but probably no more than that.
Q: With current national debt and budget deficits, when will interest in gold kick in?
A: Very simple: when the stock market goes down, you want to buy gold. It’s the hedge that everyone will chase after, and inflation is just around the corner.
Q: Do you need me to place any Kentucky Derby bets?
A: Me being the cautious guy I am, I pick the horse with the best odds and then I bet him to show. That almost always works.
Q: What about pot stocks?
A: I’ve never liked them very much; after all, how hard is it to grow a weed? The barriers to entry are zero. All of these pot companies coming up now are not really pot stocks as much as they are marketing companies, so you’re buying their distribution capability primarily. That said, I’m having breakfast with the CEO of a major pot company next week, so I’ll be writing about that once I get the inside scoop.
Q: Will the Fed be the non-event?
A: Yes, as stated in the Mad Hedge Hot Tips this morning, it will be a non-event and the news is due out in about an hour.
Mad Hedge Technology Letter
April 30, 2019
Fiat Lux
Featured Trade:
(AMAZON’S NEW GAME CHANGER)
(AMZN), (WMT), (TGT), (UPS), (FDX)
Amazon’s free 2-day shipping for Prime Customers is on the verge of becoming free 1-day shipping after the company recently announced this new wrinkle to their business model.
Amazon’s competitors should be shivering in their wake.
But it’s not all doom and gloom for the other e-commerce giants, hardly so, the gap up in the fierce competition will do what General Data Protection Regulation (GDPR) rules in Europe did to competition – enclose the existing players off from the smaller fish.
In examining who will be the last man standing, I have come to the conclusion that it will not just be one or two grinding it out in a vacuum, but more like several winners that will all benefit to certain degrees.
The outsized denominating factor in the e-commerce wars is logistics and who can best put this segment together.
E-commerce companies are being bullied into leaner models because of the premium on heavy scaling that will pile on added costs to make 1-day free shipping a reality.
This isn’t selling lemonade on your driveway, getting 1-day shipping to work will be a tough nut to crack.
The result will be the imminent deterioration of FedEx (FDX) and United Parcel Service (UPS) on the expectation that Amazon will crowd them out.
It could be the case that Amazon improves its logistical capabilities to the point that FedEx and UPS will have to sell itself off or risk death by a thousand cuts.
There looks like no navigational path ahead for these two legacy logistic companies because of the nature of being lower down on the value chain.
The only other choice is if FedEx or UPS is able to jump into the e-commerce business themselves by buying a Kroger to maneuver into the integration process through the other side.
Either way, acquiring a supermarket is no guarantee of future success considering the stakes are about to become higher and higher.
I believe that Walmart will respond to Amazon by rolling out free 1-day shipping with no membership fee, boosting its customer experience while attracting and retaining customers.
Walmart is in this fight until the bitter end and they have invested heavily in improving the technological aspects of the company.
Where does this end?
Logistics will perpetually improve as companies drain more money into logistics, and customers will eventually receive their e-commerce packages in a drone less than 1-hour after payment.
Amazon CFO Brian Olsavsky told investors that Amazon is plunking down $800 million over the quarter in its fulfillment network and that number should rise every year as Amazon has targeted logistics as a huge competitive advantage that they must capitalize on and thrive in.
Amazon already has the option for 1-day free shipping in the European Union and Japan where the delivery distances are truncated.
America poses geographical challenges that will cost more to solve and will rely on the deregulation of future drone flights and cooperation with Amazon sellers to deliver this big step up in customer experience.
The constant iteration upgrades in logistics for the past 20 years have made this possible, and I believe Amazon would be well served to bite the bullet and splurge for UPS or FedEx to make it easier on themselves.
It is not shocking there is a scarcity value of logistic carriers and e-commerce giants will need more logistical capacity to execute free 1-day shipping and eventually free 1-hour shopping.
Amazon hasn’t figured out how to transport physical goods through a computer yet, but I am certain, if there was the technology, they would spend unlimited amounts to get it to that point.
The most ironic aspect of the e-commerce wars is that supermarkets, being a part of e-commerce and the logistics behind it, is the most innovative part of technology at this moment.
Tech companies have identified that customers need to eat three times per day as paramount and are sizzling through cash to build this unfathomable logistics system - effectively working miracles and becoming whirling dervishes to seize this part of the economy.
I would probably label automobiles and the self-driving autonomous technology behind logistics as the second most innovative part of technology at this moment.
As for Amazon’s earnings report, it was a mixed bag, but the good in the bag was astounding.
Profitability boosts through the scaling and efficiency savings inflated the bottom line with EPS in Q1 at $7.09 compared to expectations of $4.72.
Amazon Web Services (AWS) is still commanding enormous growth rates which is miraculous for a division its size, the cloud unit grew 41% YOY which is down from 49% last year.
On the negative side, the advertising business experienced a sharp slow down growing only 34% YOY to $2.7 billion.
Remember that ad sales were expanding over 100% YOY in prior quarters.
Total Revenue only grew 16.9% which shows how difficult it is to grow at Amazon’s size and brings down the digital ad growth rate almost on par with Facebook.
Walmart and Target will be forced to compete with free 1-day shipping, and this will make their services better as well.
The question is how much pain can investors handle in terms of capital investments?
I believe substantially more.
Walmart and Target shares are poised to move higher on the news because the improvements in their logistical services will widen the gap between the haves and have nots.
These companies are in the midst of persuading investors they should be revalued as tech companies and duly receive growth multiples.
They are doing a great job and imagine how badly this news feels for medium-tier grocers with a minimal digital footprint.
Investors will come to grips that Amazon, Walmart, and Target will pull away from the pack and trade blows with each other.
This time it's Amazon, but it's not the last laugh.
Where does this all lead?
The end game is voice-triggering smart speakers where Amazon and its Echo speaker have a distinctive lead and a market share of around 70%.
Graphic interfaces will exist in only voice-activated form and content will be bundled into voice technology where even managing a Walmart order will require Amazon Echo to register sales.
That type of future is still a way off, but these are the next baby steps in that direction.
In short, revelations of free 1-day shipping to Amazon prime customers is convincingly bullish for Amazon, quite bullish for Walmart, Target, and a death knell for smaller e-commerce platforms and logistic dinosaurs.
Global Market Comments
April 23, 2019
Fiat Lux
Featured Trade:
(LAS VEGAS MAY 9 GLOBAL STRAGEGY LUNCHEON)
(APRIL 17 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXI), (RWM), (IWM), (VXXB), (VIX), (QCOM), (AAPL), (GM), (TSLA), (FCX), (COPX), (GLD), (NFLX), (AMZN), (DIS)