(AMZN) Archives

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 20, 2019

Tech Letter

Mad Hedge Technology Letter
February 20, 2019
Fiat Lux

Featured Trade:

(WALMART’S DRAMATIC SAVE),
(WMT), (AMZN)

Walmart's Dramatic Save

Tech Letter

This is not your father’s Walmart (WMT).

Peel back a layer or two of that thin veneer and in Walmart, you have nothing closely resembling the Walmart you grew up with.

This would have been a coup de grâce for many companies facing the tsunami of tech strength crushing business models left and right.

Yet, Walmart has found a way to turn the tables and flourish when many industry experts thought this once legacy shopping business was careening towards extinction.

Walmart’s outstanding performance of growing e-commerce sales 43% YOY in the winter quarter of 2018 is a proclamation that they are here to stay through hell or high water and it’s the e-commerce segment leading the charge.

Betting the ranch on e-commerce has them inevitably on a collision course heading directly towards competitor Amazon (AMZN).

Instead of shriveling up and waving the white flag, Walmart’s President and CEO Doug McMillon is acutely aware that the overall pie is growing and there is room for more than just Amazon.

His company’s recent success echoes this trend of the overall marketing growing, and I believe passing the acid test of the 2018 winter shopping season is concrete evidence that Walmart has a prosperous future if they can navigate around four objectives.

First, triple-down on the e-commerce strategy which could translate into being a tad cavalier to operating margins.

This would take a machete to short-term profitability, but I believe Walmart investors are starting to believe in this tech pivot and further margin erosion can be stomached because they are currently conditioned for it.

To capture a larger footprint in the e-commerce market, data analytics specialists will need to be recruited in heavy numbers and convinced of the future vision of Walmart.

The turn of the calendar year means that end of the year bonuses are out and now is the time to capture the horde of tech talent sitting on the open market waiting to be put on Walmart’s books.

Walmart could potentially leap into position to nab some of these tech high flyers who specialize in Python and SQL programming languages. The demand for these wizards is insatiable and the key to any corporate digital migration strategy.

Second, being able to penetrate the target audience a notch above than what Walmart is traditionally accustomed to.

This would correlate into higher average spend per Walmart transaction which would become a feedback loop into Walmart carving out higher-grade product line-ups to compensate increasingly pressured margins.

Third, enhance the logistics and fulfillment strategy by automating more of the business process through robotics and a streamlined IT department.

Walmart has been in the process of scaling out this portion of the business process and they are probably the only one that can pull this off because of the gigantic addressable market and flowing access to capital.

Fourth, originate an educational program coaching up spendthrift customers on how to access its products digitally.

Investors must remember that a large swath of Walmart’s customers aren’t at the top of the socioeconomic ladder and seamlessly culling them into the digital orbit is a responsibility shouldered on upper management.

The goal is to gradually migrate every type of order variant online or through self-checkout means, and self-navigating through these payment and service barriers could be a hindrance as Walmart’s customer base is less tech-savvy than Amazon’s prime subscription customer base.

However, the smaller digital native customer base on a percentage basis is offset by the 4,700 physical stores allowing these partially digital-savvy customers to click and collect.

I view the click and collect distribution channel as a bridge towards becoming fully digital and if Walmart can provide superior customers service, this cohort will likely stick with Walmart’s full-service digital offerings in the future once they upgrade.

In the distant future, it’s almost guaranteed these physical stores end up as fulfillment centers with robotic automation or some type of mix of the two.

Walmart is starting to get serious looks as an e-commerce powerhouse, and I have consistently described Walmart as the next FANG. This latest earnings report reinforces this thesis.

I champion some of the moves to add to product lines such as online brands Art.com and female garment retailer Bare Necessities.

If Walmart could whip up an in-house brand similar to Amazon Basics, that would also be a gamechanger. That step is down the road and Walmart would need to accumulate higher expertise to convert certain products from the 3^rd party variety.

Another growth inducer would be establishing a subscription-based service similar to Amazon Prime. Software as a subscription (SaaS) is all the rage in technology and for all the right reasons as this recurring revenue is a boon for the CFO and stabilizes finances.

The Arkansas-based firm forecasted e-commerce annual sales growth of 35% and indicated that huge sums of capital would be allocated into remodeling store units, reinforcing the e-commerce platform, and juicing up its supply chain operations.

Walmart is only scratching the surface and it would take a debacle of epic proportions or a massive recession crimping product demand to knock off Walmart from this high-speed train of positive momentum.

Yes, I agree this company isn’t even close to Amazon now, but the catch-up potential and that path to catch up is clear as daylight.

There is no need to chase shares at this price, but I can say that Walmart is on the verge of locking itself up at the $100 price point as an eternal support level moving forward.

If shares sell off to $90 because of the recent buying from oversold conditions, it could be one of the last times ever to secure a price that cheaply for a precious FANG company.

The company is also famous for continuously raising its dividend.

Walmart is an intriguing stock for the rest of 2019, particularly if the momentum snowballs from here.

February 19, 2019

Diary, Newsletter, Summary

Global Market Comments
February 19, 2019
Fiat Lux

Featured Trade:

(THE MARKET FOR THE WEEK AHEAD, or ALARM BELLS ARE RINGING)
(SPY), (TLT), (GLD), (AMZN)

The Market Outlook for the Week Ahead, or Alarm Bells are Ringing

Diary, Newsletter

There is not a single hedge fund manager out there today who doesn’t believe that stock markets are on the verge of a very sharp selloff.

Earnings are falling. Europe is tipping into recession. The money supply is shrinking at a dramatic pace (see chart below). And government borrowing will double this year as compared to last. Yet the major indexes are 5% of an all-time high with valuations at an 18X multiple, the high end of the historic range.

You may be wondering why a correction, if not a new bear market, hasn’t already started yet. Every trader on Wall Street is nervously awaiting a China trade deal, possible weeks away, that they can all sell into, including me. The China negotiations have robbed traders of a decent short side entry point for a year now.

You may think I am being excessively cautious with these views. However, US equity mutual funds have suffered eleven straight weeks of outflows worth $80 billion, an all-time record. You really wonder what is supporting the market here. Are we in for a “Wiley Coyote” moment?

Who is left to buy the market? Short coverers, algorithms, and corporations buying back their own shares. There are in effect no real net investors.

One can’t help but notice the constantly worsening in the economic data that took place last week. Was this all happening in response to the December stock market crash? Or is it heralding a full-blown recession that has already started?

This is all backward-looking data, in some cases as much as two months. But what followed the December crash? The January government shut down which we already know pared 75 basis points off of Q1 GDP growth. That’s why companies announced middling earnings for Q4 but horrendous guidance for Q1.

December Retail Sales came in at a disastrous ten-year low. If you’re looking for an early recession indicator, this is a big one. Maybe it’s because the prices are falling so fast?

The NY Fed slashed Q1 GDP estimates to below 2% with more cuts to come. Trade war uncertainty cited as the number one reason.

Consumer Spending is slowing. That means the recession is near. Fund managers are universally moving into defensive and value stocks. So, should you.

Car Sales fell at the fastest rate in a decade, as US Manufacturing Output drives off a cliff. There is also a subprime crisis going on here, if you haven’t heard.

Amazon (AMZN) told New York City to drop dead as it canceled plans to build a second headquarters in New York, thanks to opposition from a local but vociferous minority. Some 25,000 jobs went down the toilet. More likely, they don’t want to expand their business right ahead of a recession. Jeff Bezos can see into the future infinitely better than you and I can.

You have to take Jeff’s thoughts seriously. Amazon added more square feet in the US than any other company last year, bringing the total to 288 million square feet. That is a staggering 28 World Trade Centers. Do they know something we don’t?

In the meantime, American Personal Debt is soaring, hitting a new apex at $13.5 trillion. Some 9.1% of this is already delinquent, and credit cards are being canceled at an alarming pace.

Business Confidence hit a two-year low, and Consumer Confidence hits an eight-year low. It seems a government shutdown and a stock market crash are not good for business. Now that stocks are up, will confidence return?

Inflation hit a one year low, with the Consumer Price Index coming in at only 1.9%. It means the next recession will bring deflation.

The Mad Hedge Market Timing Index is entering danger territory with a reading of 70 for the first time in five months. Better start taking profits on those aggressive leveraged longs you bought in early January. Your best performers are about to take a big hit. The market has since sold off 500 points proving its value.

There wasn’t much to do in the market this week, given that I am trying to wind my portfolio down to 100% cash as the market peaks.

February has so far come in at a hot +3.31%. My 2019 year to date return leveled out at +12.79%, boosting my trailing one-year return back up to +34.12%.

My nine-year return clawed its way up to +312.93%, another new high. The average annualized return ratcheted up to +34.12%.

I am now 90% in cash and 10% long gold (GLD), a perfect downside hedge in a “RISK OFF”. We have managed to catch every major market trend this year, loading the boat with technology stocks at the beginning of January, selling short bonds, and buying gold (GLD).

Government data is finally starting to trickle out now that the government shutdown is over.

On Monday, February 18 was Presidents Day and the markets were closed.

On Tuesday, February 19, 10:00 AM EST, the Homebuilders Index is released.

On Wednesday, February 20 at 2:00 AM EST, Minutes from the January FOMC meeting are released. How dovish are they really?

Thursday, February 21 at 8:30 AM EST, we get Weekly Jobless Claims. At 10:00 AM, Existing Home Sales are out.

On Friday, February 22, there will be a half a dozen public Fed speakers suggesting that interest rates will go up, down, or sideways. The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I’ll be digging out from the massive series of snowstorms that hit me at my Lake Tahoe Estate. Snowfall this season has so far hit 50 feet and is challenging the 70-foot record from three years ago.

Good luck and good trading.

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

February 15, 2019

Diary, Newsletter, Summary

Global Market Comments
February 15, 2019
Fiat Lux

Featured Trade:

(THE CONTINUING DEATH OF RETAIL),
(AMZN), (WMT), (M), (JWN),
(TESTIMONIAL)

February 13, 2019

Tech Letter

Mad Hedge Technology Letter
February 13, 2019
Fiat Lux

Featured Trade:

(WHY THE FUTURE IS NOT IN FURNITURE),
(W), (NWARF), (AMZN)

Why the Future is not in Furniture

Tech Letter

Avoid online furniture e-store Wayfair (W) – it’s too expensive.

That was my conclusion after going over the company’s data with a fine-tooth comb.

The stock is up over 600% over the past 5 years, it’s certainly a performance of a rock star in retrospect but it is far from a guaranteed indicator of future success by any means.

Shares have outgained the broader market by a wide margin resulting from January’s snapback in oversold territory scorching skyward 22% compared to an 8% spike in the S&P 500.

Investors must look at the performance of the company and deduce if the path forward is littered with booby traps or if it is as smooth as a slab of granite.

I would argue the former.

Just because the company is in e-commerce doesn’t mean it gets a free pass.

When you hear the word e-commerce, the mind darts and dives to the success of Amazon (AMZN) and observers must assume that if it’s doing the same job as Amazon, cash must be falling from the sky.

Well, the truth is sometimes harsh, and unfortunately, this company is nothing close to Amazon.

Wayfair sells furniture, a tough business from the onset.

Investors must ask themselves - does Wayfair optimally sell furniture and run its company efficiently?

First, the good.

Sales have gone gangbusters the past few years and this is the catalyst driving the stock northwards.

The company presided over a 3-year sales growth rate of 44% - impressive for a cloud company, let alone an online furniture company.

In the past 3 years, the company has more than doubled sales from $2.25 billion in 2015.

Noticeably, tech growth investors have piled into this name propping it up irrespective of any problems behind the lipstick.

The knock on Wayfair is not the amount of growth but the net quality of growth.

These two must be differentiated and have ramifications affecting the firm’s ability to nurture return business down the road.

Take a quick spin on their official website by clicking here.

Right away, before the user can even take a glance at what the website has to offer, the company is vigorously fishing for an email address to allow the reader to continue.

Without entering an email, the prospective customer is stopped dead in its tracks clicking out of the website – too aggressive for my taste.

Why hand over a personal email when any Amazon prime user can just migrate to Amazon’s search bar without all these hoops that need to be jumped through?

The subsequent message attached to the email signup form says, “Up to 70% off Every Day - Shop every style of furniture and décor at up to 70% OFF. - Exclusive sales start daily.”

If you finally decide the site is worth your time and want to insert your email to move forward pass the first barrier, almost every inch of the site is peppered with over excessive 70% sales reminders.

Don’t forget the first pop-up described the same thing – and now it’s sales promotion overload.

This aggressive marketing push reminds me of a company who knows they cannot compete long-term and believes a marketing solution is the elixir to all of its ills.

Wayfair has performed admirably at growing sales the past few years, and that cannot be taken away.

But its sales success has been carried out in an over-reaching way with respect to the health of the company.

Effectively, Wayfair has been sacrificing margin and burning cash at a high rate potentially disenfranchising its shareholder base in the near future.

This will end in tears.

I cannot envision a scenario where this same business model perpetuates due to a lack of a differentiated advantage.

They do nothing more than the next guy does.

The more I use the website, the more I want to revert back to Amazon and buy furniture from Jeff Bezos.

The situation echoes the current situation with low-cost airlines Wow Airlines from Iceland and Norwegian Air Shuttle (NWARF) who doubled down on the same type of strategy that took them to the brink of solvency.

Wayfair’s advertising and marketing expenses have been growing 30-40% per year along with customer service expenses.

Net income has gotten clobbered during this time span as well.

Wayfair lost less than $50 million in 2015. The losses have racked up to almost $450 million at the beginning of 2019.

As quarterly EPS has cratered, Wayfair has missed the past 4 quarterly EPS forecasts demonstrating a continuous lack of execution from management and an inferior strategy.

The EPS percentage change on a sequential basis was negative 97% last quarter.

This company will end up as a pump-and-dump stock, and I speculate no viable path forward to profitability unless major surgery is done to this business model.

I highly doubt that Wayfair can consistently maintain mid-40% sales expansion, and if it does, it is only a matter of time until the ripcord is pulled and the pilots abort the plane before it crashes into the ocean.

As soon as this turns sour, whether it be a recession or the sales strategy becomes impotent, shares will face Armageddon.

Ultimately, the risk/reward proposition is poor, but that doesn’t mean this stock can’t rally a further 30% on the back of a dovish Fed and kick the can down the road trade deal.

If they can clock in mid-40% sales growth, it doesn’t matter if they slaughter net income and expenses because growth investors will come out the woodwork to buttress this online furniture store.

Stay away from this high-risk company.

This is almost a tale of the emperor's new clothes.

February 6, 2019

Tech Letter

Mad Hedge Technology Letter
February 6, 2019
Fiat Lux

Featured Trade:

(ALPHABET WOWS THEM AGAIN),
(GOOGL), (AMZN), (AAPL), (MSFT)

Alphabet Wows Them Again!

Tech Letter

Alphabet (GOOGL) is entangled in the same imbroglio as Apple (AAPL), that is why I have held back on issuing any trade alerts on this name.

The stalwart is still grinding out a respectable 20% of revenue growth in their core business but the underlying conundrum is that their hyper-growth segments are 5 times or more diminutive than their bread and butter of digital ads.

Apple is addressing the same type of strain in attempting to flip high octane revenue drivers into a bigger piece of the pie – the services business trails the hardware business by a large margin.

This phenomenon highlights how investors demand tech companies to grow at elevated rates and a maturing business model isn’t given any free passes.

Investors simply migrate towards higher growth names period.

That being said, Alphabet’s digital ad business is one of the premier tech divisions in all of technology and the American economy.

How powerful is it?

They did $32.6 billion in sales last quarter.

If you look at that number without context, it is quite impressive, but there are several lurking impediments.

This 20% QOQ growth is flatter than a pancake offering evidence that the best days are behind them.

No investors like to hear the dreaded “P word” thrown into a company’s business trajectory – peak.

In respect to revenue growth rates, I expect Google’s digital ad business to gradually decline relative to competition.

This segment also battles with the law of large numbers.

It’s simply difficult to accelerate revenue rates at a 25% YOY clip when revenues are already over $30 billion per quarter. Again, this is another Apple problem and a side effect of being overly successful in one part of the business model.

If investors' tepid reaction about these aspects of the core business telegraph dissatisfaction, then discovering further ancillary problems might be the final dagger in the heart.

Google search’s price per click cratered 29% YOY indicating that variables in the current marketing environment have significantly blunted Google’s pricing power.

Traffic Acquisition Cost (TAC) represents the cost for a company to acquire internet traffic onto their assets.

Alphabet faced a 15% YOY rise in TAC costs last quarter to $7.44 billion illustrating the difficulty in keeping these high costs down.

The bulk of the $7.44 billion stems from a widely known agreement with Apple contracting Google search as its default search engine on Apple devices.

This TAC expense has been surging the past few years and Alphabet has little negotiating power.

Expect an annual 15-20% rise in TAC expenses as long as Alphabet’s digital ads are expanding the standard vanilla 20% most investors expect them to grow.

As a whole, TAC costs soaked up 23% of the digital ad revenue which was in line with analysts’ expectations.

However, I expect this number to surpass 25% before winter because I believe Google search’s ad business will confront ceaseless growth problems.

Amazon’s (AMZN) new-found digital ad business is an influential factor in this story.

New marketing dollars aren’t being showered on Google as they once were, over 50% of product searches populate from Amazon.com today boding poorly for the future of Google search.

This optionality could be a large reason in driving the cost per click downwards.

CEO of Amazon Jeff Bezos refused to enter the digital ad game for years but his recent change of heart will correlate to subduing Google digital ad model.

Consumers are finding less incentive to search on Google for products when they just can smartly and efficiently search on Amazon directly.

Clearly, this only affects product searches and not searches on other informative content such as widely popular searches including “top 10 places to travel in Europe” or “best Thanksgiving recipes.”

Google’s “other revenues” is chugging along nicely with 31% YOY growth headed by Google’s cloud business and hardware division.

This is what Alphabet needs to focus on going forward similar to Microsoft and Amazon web services.

Yes, Google is the 3^rd biggest cloud player but miles behind the top two.

Being in catch-up mode is no fun and is part of the reason capital expenditures exploded and came in $1.38 billion higher than expected.

Alphabet simply isn’t doing a good job at executing relative to Amazon and Microsoft frittering away more capital in the name of growth but not curating the type of growth that current expenses justify.

Higher costs damaged operating margins coming down 2% YOY to 21%.

Even more worrisome is that there has been no material progress on the Waymo business.

This is the year that Alphabet expected the technology to roll out to the masses.

However, this broad-based integration will not happen as fast as they would like.

I blame regulation and consumers' hesitation to quickly adopt this new technology.

Alphabet is reliant on this business to carry them to the next level of growth and I believe it can become a $100 billion per year business in a $2 trillion addressable market.

But when you peruse through the “Other Bets” category which houses Alphabet’s other companies such as health venture Verily, the $154 million in revenue was a huge miss against the $187.4 million expected.

Estimates aside, the pitiful fact that Waymo only brings in revenue of less than 1% of total revenue is disappointing.

Summing things up, Alphabet is a great company and is a long-term buy and hold stock even with short term transitory headaches.

In the near term, there is uneasiness about the decreasing profitability, exploding expense factors, a heavy reliance on weakening core business revenue, and a lack of top-line contribution of “other revenues” relative to their core business.

Long term, Alphabet’s game-changing investments have yet to show signs of life in terms of real revenue expansion even though Alphabet is the global leader of artificial intelligence and self-driving technology.

Investors would like to see actionable steps to incorporate this best of breed technology that funnels down to the top and bottom line.

Investors are stuck with a stale digital ads business that has locked the stock into a holding pattern essentially trading sideways for the past year until they prove they are ready to take the next step up.

Looking at Alphabet’s chart, the stock has iron-clad support at $1,000 which it tested in April 2018 and December 2018.

Using this entry point as the lower range would be sensible as I don’t foresee any demonstrably negative news blindsiding the stock, and I surmise that investors will start receiving positive news on Waymo’s roll out towards the middle of the year.

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