Mad Hedge Technology Letter
August 2, 2019
(THE GREAT LATIN AMERICAN INTERNET PLAY),
(MELI), (PYPL), (AMZN), (EBAY)
Mad Hedge Technology Letter
August 2, 2019
(THE GREAT LATIN AMERICAN INTERNET PLAY),
(MELI), (PYPL), (AMZN), (EBAY)
How do you get exposure to the e-commerce story in Latin America?
The best way to do that is to dive into Mercado Libre (MELI), meaning “free market” in Spanish, an Argentine company incorporated in the United States that operates online marketplaces dedicated to e-commerce and online auctions, including mercadolibre.com.
Mercado Libre was established as an Argentine company in 1999 and Founder & CEO Marcos Galperin, while attending Stanford University, acquired funding from HM Capital Partners co-founder John Muse to start his brainchild.
Mercado Libre received additional funding from JPMorgan Partners, Flatiron Partners, Goldman Sachs, GE Capital, and Banco Santander Central Hispano.
The company has used M&A along with organic growth to drive the company.
Relevant examples are of eBay (EBAY) buying a 19.5% stake in the company and then selling its stake in Mercado Libre in 2016, but the companies continue to expand eBay sellers into Latin America.
The cooperation remains strong with eBay opening its first branded store on the Mercado Libre marketplace from Chile in March 2017.
Mercado Libre has acquired iBazar Como, the Brazilian subsidiary of eBay’s earlier acquisition, iBazar S.A.
The success culminated with becoming the first Latin American technology company to be listed on the NASDAQ, under the ticker symbol MELI.
The firm offers investors a way to invest in one of the fastest-growing e-commerce markets in the world.
The company has 280 million registered users out of 644 million people who live in Latin America.
The stock has soared 543% in the last five years making the firm one of the fastest growing e-commerce companies in the world by many metrics.
The main drag is that the valuation looks frothy at these price levels.
Mobile payments have mushroomed naturally because of its title, the “eBay of Latin America.”
They can also claim to be the PayPal of the region, thanks to robust growth happening in the MercadoPago digital payments business.
In the first quarter, total payment volume rose 82.5% year-over-year.
Off-marketplace payment volume is up 194% – accelerating each and every quarter.
Off-marketplace payments now comprise 45% of the company’s total payment volume, and management sees high penetration trends happening in certain areas.
PayPal (PYPL) have become huge supporters of MercadoLibre with an investment of $750 million into MercadoPago.
The deal will join the firms together to work on the shared vision to digitize the economy, especially for the underbanked, in Latin America.
It’s a stamp of approval of Mercado’s brand recognition in the region that PayPal chose to invest in the company instead of competing.
How fast is the addressable market growing?
Investors have been seduced by the company’s impressive growth in payments, but the core marketplace business is still doing backflips.
Gross merchandise volume (GMV) expanded 27% year-over-year in the first quarter, driven by 70% growth in Mexico.
Brazil is the largest market and expanded GMV by 18% year-over-year in the quarter.
Management referenced supermarket items in Mexico and increasing apparel selection as two areas that are showing strong results.
Apparel is the fastest-growing category, up 79% year-over-year last quarter.
With signs that new development is headed in the right direction, new categories and the company expanding its logistics footprint, the market will definitely expand.
MercadoLibre can grow beyond the marketplace business to become a formidable fintech company.
As it expands into other services, Mercado is fortifying its strong brand across Latin America.
Even as Amazon.com (AMZN) enters the high stakes industry, Mercado’s first mover advantage can’t be underestimated.
The stock is pricey so lay off it for the time being but add with any major dips.
Global Market Comments
July 29, 2019
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE BAD OMENS ARE THERE),
(INTC), (GOOGL), (AMZN), (JPM), (FXB),
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
The Omens are there.
I am normally a pretty positive guy.
But I was having a beer at Schwarzee at the base of the Matterhorn the other day, just having completed the climb up to the Hornli Hut at 10,758 feet. I carefully watched with my binoculars three helicopters circle the summit of the mountain, around the Solvay Hut.
These were not sightseeing tours. The pilots were taking great risks to retrieve bodies.
I learned at the Bergfuhrerverein Zermatt the next day that one of their men was taking up an American client to the summit. The man reached for a handhold and the rock broke loose, taking both men to their deaths. The Mountain Guide Service of Zermatt is a lot like the US Marine Corps. They always retrieve their dead.
It is an accident that could have happened to anyone. I have been over that route many times. If there was ever an omen of trouble to come, this was it.
The markets are sending out a few foreboding warnings of their own. Friday’s Q2 GDP report came in at a better than expected 2.1%, versus 3.1% in Q1.
Yet the Dow Average was up only a meager 51.47 points when it should have gained 500. It is an old market nostrum that if markets can’t rally on good news, you get the hell out of Dodge. Zermatt too.
It is the slowest US growth in two years. The trade war gets the blame, with falling exports offsetting healthy consumer spending. With the $1.5 trillion tax cut now spent, nothing is left but the debt. 2020 recession fears are running rampant, so paying all-time highs for stock prices is not a great idea.
You might be celebrating last week’s budget deal which heads off a September government shutdown. But it boosts the national debt from $22 to $24 trillion, or $72,000 per American. As with everything else with this administration, a short-term gain is achieved at a very high long-term cost.
Boris Johnson, the pro-Brexit activist, was named UK prime minister. It virtually guarantees a recession there and will act as an additional drag on the US economy. Global businesses will accelerate their departure from London to Paris and Berlin.
The end result may be a disunited kingdom, with Scotland declaring independence in order to stay in the EC, and Northern Ireland splitting off to create a united emerald island. The stock market there will crater and the pound (FXB) will go to parity against the greenback.
The European economy is already in a downward spiral, with German economic data flat on its back. GDP growth has shrunk from 2.0% to 0.7%. It seems we are not buying enough Mercedes, BMWs, and Volkswagens.
Yields on ten-year German bunds hit close to an all-time low at -0.39%. The Euro (FXE) is looking at a breakdown through parity. The country’s largest financial institution, Deutsche Bank, is about to go under. No one here wants to touch equities there. It’s all about finding more bonds.
Soaring Chip Stocks took NASDAQ to new high. I have to admit I missed this one, not expecting a recovery until the China trade war ended. Chip prices are still falling, and volume is shrinking. We still love (AMD), (MU), and (NVDA) long term as obviously do current buyers.
Existing Home Sales fell off a cliff, down 1.7% in June to a seasonally adjusted 5.27 million units. Median Home Prices jumped 4.7% to $287,400. A shortage of entry-level units at decent prices get the blame. Ultra-low interest rates are having no impact.
JP Morgan (JPM) expects stocks to dive in Q3, driven by earnings downgrades for 2020. Who am I to argue with Jamie Diamond? Don’t lose what you made in H1 chasing rich stocks in H2. Everyone I know is bailing on the market and I am 100% cash going into this week’s Fed meeting up 18.33% year-to-date. I made 3.06% in July in only two weeks.
Alphabet (GOOGL) beat big time, sending the shares up 8% in aftermarket trading. Q2 revenues soared 19% YOY to an eye-popping $39.7 billion. It’s the biggest gain in the stock in four years, to $1,226. The laggard FANG finally catches up. The weak first quarter is now long forgotten.
Amazon (AMZN) delivered a rare miss, as heavy investment spending on more market share offset sales growth, taking the shares down 1%. Amazon Prime membership now tops 100 million. Q3 is also looking weak.
Intel (INTC) surged on chip stockpiling, taking the stock up 5% to $54.70. Customers in China stockpiled chips ahead of a worsening trade war. Q3 forecasts are looking even better. Sale of its 5G modem chip business to Apple is seen as a huge positive.
I’ve finally headed home, after a peripatetic six-week, 18-flight trip around the world meeting clients. I bailed on the continent just in time to escape a record heatwave, with Paris hitting 105 degrees and London 101, where it was so hot that people were passing out on the non-air conditioned underground.
Avoid energy stocks. The outcry over global warming is about to get very loud. I’ll write a more detailed report on the trip when I get a break in the market.
My strategy of avoiding stocks and only investing in weak dollar plays like bonds (TLT), foreign exchange (FXA), and copper (FCX) performed well. After spending a few weeks out of the market, it’s amazing how clear things become. The clouds lift and the fog disperses.
My Global Trading Dispatch has hit a new high for the year at +18.33% and has earned a robust 3.09% so far in July. Nothing like coming out of the blocks for an uncertain H2 on a hot streak. I’m inclined to stay in cash until the Fed interest rate decision on Wednesday.
My ten-year average annualized profit bobbed up to +33.23%. With the markets now in the process of peaking out for the short term, I am now 100% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter. If there is one thing supporting the market now, it is the fact that my Mad Hedge Market Timing Index has pulled back to a neutral 60. It’s a Goldilocks level, not too hot and not too cold.
The coming week will be a big one on the data front, with one big bombshell on Wednesday and the Payroll data on Friday.
On Monday, July 29, the Dallas Fed Manufacturing Index is out.
On Tuesday, July 30, we get June Pending Home Sales. A new Case Shiller S&P National Home Price Index is published. Look for YOY gains to shrink.
On Wednesday, July 31, at 8:30 AM, learn the ADP Private Employment Report. At 2:00 PM, the Fed interest rate decision is released and an extended press conference follows. If they don’t cut rates, there will be hell to pay.
On Thursday, August 1 at 8:30 AM, the Weekly Jobless Claims are printed.
On Friday, August 2 at 8:30 AM, we get the July Nonfarm Payroll Report. Recent numbers have been hot so that is likely to continue.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, by the time you read this, I will have walked the 25 minutes from my Alpine chalet down to the Zermatt Bahnhoff, ridden the picturesque cog railway down to Brig, and picked up an express train through the 12-mile long Simplon Tunnel to Milan, Italy.
Then I’ll spend the rest of the weekend winging my way home to San Francisco in cramped conditions on Air Italy. Yes, I had to get a few more cappuccinos and a good Italian dinner before coming home.
Now, on with the task of doubling my performance by yearend.
Good luck and good trading.
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
July 29, 2019
(THE RACE TO THE BOTTOM),
(SCHW), (FB), (SQ), (WMT), (AMZN), (FFIDX), (BOX)
Gone are the days of brokers shouting from the trading pits, a bygone era where pimple-faced traders cut their teeth rubbing shoulders with the journeymen of yore.
The stock brokerage industry is at an inflection point with the revolutionary online stock brokerage Robinhood on the verge of shaking up an industry that has needed shaking up for years.
A common thread revisited by this newsletter is the phenomenon of broker apps being low-quality tech.
A broker ultimately serves little or no value to the real players among the deal, usually extracting huge commissions.
Technology and now blockchain technology vie to completely remove this exorbitant layer from the business process.
Well, for the stock brokerage industry, that time is now.
Robinhood is an online stock brokerage company based in Menlo Park, Calif., trading an assortment of asset classes including equities, options, and cryptocurrencies.
So, what’s the catch?
Robinhood does not charge commission.
That’s right, you can invest up until the $500,000 threshold protected by the Securities Investor Protection Corporation (SIPC) and you can go along with your merry day trading for free.
The online brokerage industry has been getting away with murder for years.
They got comfortable and stopped innovating – the death knell of any company in 2019.
Effectively, high execution costs reaping massive profits were the norm for brokers, and nobody questioned this philosophy until Robinhood exposed the ugly truth – unreasonably high rates.
Peeking at a monthly chart of brokerage costs will make your stomach churn.
For instance, a trader frequently executing trades with an account of $100,000 would hand over $1836 in commission in 2017 if their account was with Fidelity.
On the cheaper side, Interactive Brokers would charge $854 for its brokerage services to habitual traders per month.
The outlier was Tradier, a start-up brokerage founded in 2014 using the powerful tool of an Application Programming Interface (API) which charged $213 per month to trade frequently.
An API is described as a software intermediary allowing two applications to communicate with each other.
This model helped cut costs for the online brokerage because Tradier did not have to focus its funds on the trading platform that was delegated to various third-party platforms.
Tradier is largely responsible for the aggregation of data and charts thus employing an army of developers to meet their end of the business.
This model is truly the democratization of the online brokerage industry, which has been coming for years.
Costs are cut to a minimum with equity trades at Tradier costing investors $3.49 per order and options contracts costing $0.35 per contract with a $9 options assignment and exercise fee.
Technology has defeated the traditionalist again.
More than 80% of Robinhood’s accounts are owned by millennials – as expected.
Trading cryptocurrencies act as a gateway asset to springboard into other asset classes such as equities and derivative contracts.
Vlad Tenev, co-CEO of Robinhood, indicated that Robinhood will have to modify its radical business model to monetize more of the business in the future, but he is comfortable with the current business model.
But Tenev has already seen fruit borne with the likes of Robinhood applying fierce pressure to the legacy brokerages’ pricing models.
The traditionalists are locked in a vicious pricing war with each other slashing their commission rates to stay competitive.
The longer the likes of Charles Schwab (SCHW) feel it necessary to charge $4.95, down from the January 2017 cost of $8.95, the better the chances are that Robinhood can build its account base rapidly.
Charles Schwab has more than 10 million accounts, only double the number of Robinhood, after being founded in 1971.
The 42-year head start over Robinhood has not produced the desired effect, and it is ill-prepared to battle these tech companies that enter the fray.
Robinhood has been able to add a million new accounts per year. If Charles Schwab relatively performed at the same rate, it would have 47 million accounts open today.
It doesn’t and that is a problem because the company can be caught up to.
The age of specialization is upon us with full force, and customer demand requires care and diligence that never existed before.
Robinhood continues to enhance its offerings of various products adding Litecoin and Bitcoin Cash to the crypto lineup.
Only Bitcoin and Ethereum were offered before.
And there is one more outrageous thing I forgot to tell you.
Robinhood hopes to snatch away the traditional savings account by offering checking and savings accounts with an interest rate almost 30 times larger than most brick and mortar banks – 3%.
These accounts would have no minimum balances or no fees that nickel and dime customers.
The service will conveniently sit alongside its trading app and this move into the industry led by JP Morgan could start to derail Wall Street.
As with most FinTech start-ups, the roll-out of this new service was slightly botched because Robinhood failed to get the go-ahead from regulators concerning ensuring the accounts properly.
All this does is delay the inevitable and by spring 2019, potential customers should be earning 3% in Robinhood’s checking and savings account.
Sign me up!
Global Market Comments
July 26, 2019
(JULY 24 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (VIX), (VXX), (UUP), (TLT), (EEM), (ELD), (CEW), (GLD),
(FXA), (FXE), (FXC), (FXY), (FXB), (AMZN),
(TESTING TESLA’S SELF DRIVING TECHNOLOGY),
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader July 24 Global Strategy Webinar broadcast from Zermatt, Switzerland with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What are your thoughts on the Freeport McMoRan (FCX) long position here?
A: We could take a profit here. We probably have about 50% of the maximum potential profit, but I want to hang on and go to the max on this because we’re so far in the money. Cash always has a premium ahead on any Fed interest rate decision. But long term, I think the stock could double, and with the earnings report now out of the way, we have room to run.
Q: What can you say about semiconductor stocks?
A: Long term we love them, short term they are too high to chase here. I would wait for any kind of pullback and, better yet, pull back from the other side of the next recession. We’re not seeing an improvement in prices or orders so this is strictly a technical/momentum-driven trade right now.
Q: How do you play the Volatility Index (VIX)?
A: There are numerous ways you can do it; you can buy call options on the (VIX), you can buy futures on the (VIX), or you can buy the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX). We are probably a week away from a nice entry point on the long side here.
Q: Does a languishing U.S. dollar mean emerging market opportunities?
A: It absolutely does. If we really start to get a serious drop in the U.S. dollar (UUP)—like 5-10%—it will be off to the races for commodities, bonds (TLT), emerging stock markets (EEM), emerging bond markets (ELD), emerging currencies (CEW), and gold (GLD). All of your weak dollar plays will be off to the races—that’s why I went straight into bonds, the Aussie (FXA), and copper through Freeport McMoRan (FCX). All of these trades have been profitable.
Q: When should we sell the U.S. dollar?
A: How about now? For any kind of strength in a dollar against the (FXA), (FXE), (FXC) and (FXY), I would be buying any dips on those foreign exchange ETFs. We’re about to enter a six-month – one-year period weakness on the dollar. It could be the easiest trade out there. The only one I would avoid is the British pound (FXB) because of its own special problems with Brexit. You never want to go long the currency of a country that is destroying itself, which is exactly what’s happening with the pound.
Q: Should I start selling pounds?
A: It’s pretty late in the pound game now. We went into Brexit with the pound at $1.65 and got all the way down to $1.20. We’re a little bit above that now at $1.21. If for some reason, you get a surprise pop in the pound, say to $1.25, that’s where I would sell it, but down here, no.
Q: I missed the (FCX) trade—would you get in on the next dip?
A: Yes, we may not get many dips from here because the earnings were out. Today, they were not as bad as expected, and that was keeping a lot of buyers out of the market on (FCX), so any dips you can get, go a dollar out on your strikes and then take it because this thing could double over the medium term. If the trade war with China ends, this thing could make it to the old high of $50.
Q: Is now a good time to refi my home?
A: Yes, because by the time you get the paperwork and approvals and everything else done (that’ll take about 2 months), rates will likely be lower; and in any case you’re looking to refi either a 7/1 ARM or a 15-year fixed, and the rates on those have already dropped quite substantially. I was offered 3.0% for a 15-year fixed loan on my home just the other day.
Q: On trades like (FCX), why not sell short the put spread?
A: It’s really six of one, half dozen of the other. The profit on either one should be about the same. If it isn’t, an options market maker will step in and arbitrage out the difference. That’s something only an algorithm can do these days. I recommend in-the-money call spreads versus shorting sell short vertical bear put credit spreads because for beginners, in-the-money call spreads are much easier to understand.
Q: The Mueller hearings in Congress are today. Is there any potential impact on the market?
A: The market has completely detached itself from Washington—it couldn’t care less about what’s happening there. I don’t think politics have the capacity to affect stock prices. The only possible impact was the prospect of the government shutdown in September. That seems to have been averted in the latest deal between the House and the White House.
Q: What about Amazon (AMZN)?
A: Like the rest of technology, long term I love it, but short term it’s overdue for a small correction. I’m looking for Amazon to go to $3,000 a share—it’s essentially taking over the world. The antitrust threats will go absolutely nowhere; Congress doesn’t even understand what these companies do, let alone know how to break them up. I wouldn’t worry about it.
Q: I just received an email inviting me to buy a new Bitcoin auto trading system that is guaranteed to make me a millionaire in four months. It is being promoted by Nicole Kidman. Do you think I should try it?
A: I wouldn’t touch this with a ten-foot pole. No, wait. I wouldn’t touch this with a 100-foot pole! Whenever a new type of security comes out, these types of “get rich quick” investment scams come out of the woodwork. Cryptocurrency is no different. Nicole Kidman was probably paid $500,000 to make the pitch by a promotor. Or more likely, Nicole Kidman has nothing to do with these people and they just swiped her picture off the Internet. I hear about these things daily. Follow their plan and you are more likely to get completely wiped out than become a millionaire. There are NO get rich quick schemes. There are only get rich slowly strategies, such as following this newsletter. Click here to see the above-mentioned scam which you should avoid at all cost. Gee, do you think Nicole Kidman would be interested in promoting the Mad Hedge Fund Trader?
Mad Hedge Technology Letter
July 24, 2019
(CIAO SILICON VALLEY),
(AAPL), (CRM), (MSFT), (FB), (AMZN), (GOOGL)
Bridgewater Associates Founder Ray Dalio carefully articulates an economic landscape in which the unrelenting chase for short-term tech profits finally catches up meaningfully with the gyrations of tech shares.
All of this could come home to roost and the early manifestations can be found in the housing migratory trends.
The robust housing demand, lack of housing supply, mixed with the avalanche of inquisitive tech money will propel these housing markets to new heights and this phenomenon is happening as we speak.
Salesforce Founder and CEO Marc Benioff has lamented that San Francisco, where ironically he is from, is a diabolical “train wreck” and urged fellow tech CEOs to “walk down the street” and see it with their own eyes to observe the numerous homeless encampments dotted around the city limits.
The leader of Salesforce doesn’t mince his words when he talks and beelines to the heart of the issues.
After relinquishing some of his CEO duties to newly anointed Co-CEO Keith Block, Benioff will have the operational time and a wealth of resources to get on top of the pulse of not only tech issues but bigger picture stuff and he now has a mouthpiece for it with Time Magazine which he and his wife recently bought.
In condemning large swaths of the beneficiaries of the Silicon Valley ethos, he has signaled that it won’t be smooth sailing forever.
In tech wonderland, and he urged companies to transform their business model if they are irresponsible with user data.
The tech lash could get messier this year because companies that go rogue with personal data will face a cringeworthy reckoning as the techlash fury seeps into government policy and the social stigma worsens.
I have walked around the streets of San Francisco myself.
Places around Powell Bart station close to the Tenderloin district are eyesores littered with used syringes that lay in the gutter.
South of Market Street isn’t a place I would want to barbecue on a terrace either.
Summing it up, the unlimited tech talent reservoir that Silicon Valley gorged on isn’t flowing anymore because people don’t want to live there now.
This tech talent, equipped with heart-tugging stories from siblings and anecdotes from classmates getting shafted by the San Francisco dream, has recently put the Bay Area in the rear-view mirror for many who would have stayed if it were 20 years ago.
This is exactly what Apple’s $1 billion investment into a new tech campus in Austin, Texas and Amazon adding 500 employees in Nashville, Tennessee are all about.
Apple also added numbers in San Diego, Atlanta, Culver City, and Boulder just to name a few.
Apple currently employs 90,000 people in 50 states and is in the works to create 20,000 more jobs in the US by 2023.
Most of these new jobs won’t be in Silicon Valley.
Since the tech talent isn’t giddy-upping into Silicon Valley anymore, tech firms must get off their saddle and go find them.
The tables have turned but that is what happens when the heart of western tech becomes unlivable to the average tech worker earning $150,000 per year.
Driving out young people who envision a long-term future elsewhere than the San Francisco Bay Area forces Silicon Valley to adapt to the new patterns revealing themselves.
Sacramento has experienced a dizzying rise of newcomers from the Bay Area itself.
Some are even commuting, making that 60-mile jaunt past Davis, but that will give way to entire tech operations moving to the state capitol.
Millennials are reaching that age of family formation and they are fleeing to places that are affordable and possible to become a new home buyer.
These are some of the practical issues that tech has failed to embrace and to maintain the furious pace of growth that investors’ capricious expectations harbor.
Silicon Valley will have to become more practical adding a dash of empathy as well instead of just going by the raw and heartless data.
We aren’t robots yet, and much of the world still augurs to emotional decisions and disregards the empirical data.
But, instead of physical offices being planted in the Bay Area, the tech industry will heed way to the “spirit” of Silicon Valley with offices in far-flung places.
And remember that all of these new tech talent strongholds will need housing, and housing that an IT worker making $150,000 per year desires.
No wonder why San Jose real estate has dropped in the past year, people and their paychecks are on the way out.