Mad Hedge Technology Letter
October 31, 2018
Fiat Lux
Featured Trade:
(IBM’S PUTS ON A RED HAT)
(RHT), (IBM), (AMZN), (MSFT), (GOOGL), (ORCL)
Tag Archive for: (AMZN)
What took you so long, Ginni?
That was my first reaction when I heard International Business Machines Corporation (IBM) was making a big strategic shift by purchasing open source cloud company Red Hat (RHT) in a landmark $34 billion deal.
Ginni Rometty, IBM’s CEO since 2012, has presided over persistent negative sales growth and has done zilch for investors to conjure up some type of lasting hope for this company.
Not only has Rometty failed to grow the top line, but with an underwhelming 3-year EPS growth rate of -2%, the execution and performance haven’t been there as well.
Somehow and someway, she has maintained an iron-clad grip on her job at the helm of IBM and her legacy at IBM will be wholly determined by the failure or success of this Red Hat acquisition.
IBM shares sold off on the news as shareholders digested this bombshell.
Rometty took a hatchet to share buybacks and suspended them for 2020 and 2021 alienating a segment of their loyal shareholder base.
I can tell you one thing about this move – it smells of desperation and it won’t vault IBM into the conversation of Amazon (AMZN) Web Services or the Microsoft (MSFT) Azure.
The biggest winner of this deal is Red Hat’s CEO Jim Whitehurst who has been dangling the company for sale for a while.
Alphabet (GOOGL) was in the mix and had the opportunity to snag a last-second deal, but it never came to fruition.
The 63% premium IBM must pay for a company who only grew quarterly sales 14% YOY and quarterly EPS by 10% is expensive, but that is where we are with IBM.
Clearly overpaying was better than doing nothing at all.
IBM continues to hemorrhage sales and stopping the blood flow is the first step.
Rometty was responsible for the utter failure of artificial intelligence initiative Watson whose terrible management was a key reason for its implosion.
Analyzing this historic company gave me insight into the pitiful causing me to write a bearish story on IBM last month. To read that story, please click here.
Not only was the agreed price exorbitant, but Red Hat’s stock was trending south even before the interest rate induced sell-off rocked the tech sector of late.
Red Hat missed on sales revenue forecasts and offered weak guidance.
It could be the case that Whitehurst was actively seeking a buyer because he felt that Red Hat would go ex-growth in the next few years.
Red Hat was rumored to be on the market for quite a while looking to fetch a premium price for a company starting to stagnate with its visions of grandeur growth.
Rometty’s career-defining moment is high-risk and high-reward and is born out of being cornered by leading tech companies leaving IBM in their dust.
The deal finally allows IBM to return back to sales growth which will occur two years later, and Rometty will finally have that monkey off her back for now.
But the bigger question is will Rometty still have her job in two years if this experiment becomes toxic.
My guess is that Red Hat CEO Jim Whitehurst is automatically the next in line for the IBM throne if Rometty missteps, and piling on pressure will force IBM to evolve or die out.
And even though they will return back to growth, 2% growth is no reason to do cartwheels over.
The real work starts now and it will take years to turn around this dinosaur.
On the brighter side, the massive deals instantly improve sentiment that was flagging for years and puts IBM back on the map.
The synergies between IBM and Red Hat could be robust.
Red Hat can surely help IBM become a higher-quality hybrid cloud solutions company.
Models like this are the industry standard as luring a company into your cloud is one thing, but being able to cross-sell a plethora of extra add-on software services in the cloud is the necessary path to raising profitability.
IBM also inherits a slew of talented software engineers that it can mobilize for innovative cloud products. Red Hat’s products such as JBoss middleware and the OpenShift software for deploying applications in virtual containers could make IBM’s hybrid cloud more appealing and could help retain customers with the additional offerings.
Doubling down on the software side of the business was a strategy I pinpointed at the Mad Hedge Lake Tahoe conference and deals like this highlight the value of this type of assets.
There is a hoard of legacy tech companies like Oracle (ORCL) that is in dire need of such strategic injections and fresh ideas.
This won’t be the last deal of 2018, other cloud deals could shortly follow.
On the other side of the coin, hardware deals have turned rotten quickly with stark examples such as Hewlett-Packard’s (HPQ) $25 billion acquisition of Compaq, Microsoft’s $7.2 billion disastrous buy of Nokia’s mobile handset business and Google’s unimpressive $12.5 billion deal for Motorola Mobility that they later unloaded to Chinese PC company Lenovo.
Investors must be patient if IBM has any chance of completing this turnaround.
Listening to Rometty talk about this deal clearly reveals that she is hyping it up for something way bigger than it actually is.
Let’s not forget that Rometty’s tenure as CEO began in 2012 when IBM shares were trading north of $200 and she has presided over the company while the stock got pulverized by almost 30%.
It pains me that she is the one given the chance to turn the company around after years of underperformance.
Let’s not forget that at the end of 2017, IBM only had a 1.9% share of the cloud infrastructure, about 25 times smaller than Amazon Web Services.
The costly nature of the deal could also put a dent into IBM’s dividend, alienating another swath of its hardcore shareholder base.
Historically, IBM has had minimal success with transformative M&A and the industry competitors dominating IBM magnify the poor management performance headed by Rometty.
Rometty declaring that this deal means IBM will be “no. 1 in hybrid cloud” is overly optimistic, but this is a move in the right direction and could keep IBM spiralling out of control.
A return to sales growth might help stem the bleeding of its downtrodden share price, but Amazon and Microsoft are too far ahead to catch.
Investors will need to wait and see if the synergies between IBM’s and Red Hat’s products are meaningful or not.
Mad Hedge Technology Letter
October 30, 2018
Fiat Lux
Featured Trade:
(HOW ARTIFICIAL INTELLIGENCE WILL ENHANCE OR DESTROY YOUR PORTFOLIO)
(TSLA), (AMZN), (FB)
Anti-AI physicist Professor Stephen Hawking was a staunch supporter of preserving human interests against the future existential threat from machines and artificial intelligence (AI).
He was diagnosed with motor neuron disease, more commonly known as Lou Gehrig's disease, in 1963 at the age of 21 and sadly passed away March 14, 2018, at the age of 76.
Famed for his work on black holes, Professor Hawking represented the human quest to maintain its superiority against quickly advancing artificial acculturation.
His passing is a huge loss for mankind as his voice was a deterrent to AI's relentless march to supremacy. He was one of the few who had the authority to opine on these issues. Gone is a voice of reason.
Critics have argued that living with AI poses a red alert threat to privacy, security, and society as a whole. Unfortunately, those most credible and knowledgeable about AI are tech firms. They have shown that policing themselves on this front is remarkably unproductive.
Mark Zuckerberg, CEO of Facebook (FB), has labeled naysayers as irresponsible and dismissed the threat. After failing to prevent Russian interference in the last election, he is exhibiting the same defensive posture translating into a de facto admission of guilt. His track record of shirking accountability is becoming a trend.
Share prices will materially nosedive if AI is stonewalled and development stunted. Many CEOs who stake careers on doubling or tripling down on AI cannot see it die out. There is too much money to lose.
The world will see major improvements in the quality of life in the next 10 years. But there is another side of the coin in which Zuckerberg and company refuse to delve into the dark side of technology.
Defective Amazon (AMZN) Alexa has been producing unexplained laughter because of a mistaken command to start laughing. Despite avoiding calamity, these small events show the magnitude of potential chaos capable of haywire AI functions. If one day, a user attempts to order a box of tissues and Alexa burns down the house, who is liable?
Tesla's (TSLA) CEO Elon Musk has shared his anxiety about robots flipping the script on humans. Elon acknowledges that AI and autonomous vehicles are important factors in the battle for new technology. The winner is yet to be determined as China has bet the ranch with unlimited resources from Chairman Xi.
Musk has hinted that robots and humans could merge into one species in the future. Is this the next point of competition among tech companies? The future is murky at best.
Bill Gates noted that robots should be taxed like humans. This reflects the bubble in which the ultra-elite reside. This comment implies that humans and robots are on the same level and shows a severe lack of empathy for the 40% of working Americans who will be replaced by machines over the next 10 years.
The West is comprised of a deeply hierarchical system of winners and losers. Hawking's premise that evolution has inbuilt greed can be found in the underpinnings of America's economic miracle.
Wall Street has bred a culture that is entirely self-serving regardless of the bigger system in which it finds itself.
Most of us are participating in this perpetual money game chase because our system treats it as a natural part of life. AI will help more people do well in this paper chase to the detriment of the majority.
Quarterly earnings performance is paramount for CEOs. Return value back to shareholders or face the sack in the morning. It's impossible to convince anyone that America's capitalist model is deteriorating in the greatest bull market of all time.
Wall Street has an insatiable hunger for cutting-edge technology from companies that sequentially beat earnings and raise guidance. Flourishing technology companies enrich the participants creating a Teflon-like resistance to downside market risk.
The issue with Professor Hawking's work is that his time frame is too far in the future. Professor Hawking was probably correct, but it will take 25 years to prove it.
The world is quickly changing as science fiction becomes reality. The year 2019 will signal the real beginning of AI in tangible form when autonomous fleets flood main streets.
People on Wall Street are a product of the system in place and earn a tremendous amount of money because they proficiently execute a specialized job. Traders are busy focusing on how to move ahead of the next guy.
Firms building autonomous cars are free to operate as is. Hyper-accelerating technology spurs on the development of AI, machine learning and enhanced algorithms. Record profits will topple and investors will funnel investments back into an even narrower grouping of technology stocks.
Professor Hawking said we need to explore our technological capabilities to the fullest in order to avoid extinction. In 2018, exploring these new capabilities still equals monetizing through the medium of products and services.
This is all bullish for equities as the leading companies associated with AI will not be subject to any imminent regulation, blowback or government intervention.
The only solution is keeping companies accountable by a function of law or creating a third-party task force to regulate AI.
In 2018, the thought of overseeing robots sounds crazy. However, by 2019, it might be as normal as uncontrollable laughter from your smart home.
Global Market Comments
October 29, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE COMING 2018 REPLAY),
(TLT), (SPY), (VIX), (VXX), (AAPL),
(FB), (AMZN), (NFLX), (TESLA),
(A COW-BASED ECONOMICS LESSON)
If you missed 2018, you get to do it all over again. That’s what the major indexes are offering us after giving up all of this year’s gains, and then some.
We go into the coming week with markets giving their most oversold readings since the popping of the 2000 Dotcom bubble and the 1987 crash. Markets are shouting imminent recession loud and clear.
Except that markets have discounted 13 out of the last six recessions and it is currently discounting one of those non-recessions.
Here is my calendar of upcoming potential market bottoms. Please note that all are within the next seven trading days.
October 29-reversal day of the Friday selloff.
October 31-rebalancing of funds will require a large amount of equity buying for month end. Facebook (FB) reports.
November 1-the Apple (AAPL) earnings are out.
November 7-the midterm elections.
There is no way that we are going into a recession and a bear market now. That is 2019 business. Bear markets don’t begin with real interest rates at zero which they are at now (3.1% ten-year Treasury yield – 3.1% inflation rate = zero). And they may well still be at zero in a year (4% ten-year Treasury yield – 4% inflation rate= zero).
Earnings are still great in the technology area, 50% of the national total. The Dotcom market top was characterized by the collection of vast numbers of eyeballs, not actual cash.
This means that you want to buy the big dips. This is the best entry point for blue-chip technology stocks since 2015. With a price earnings multiple now at 14.9 times 2019 earnings, stocks have given up half the valuation gains since the 2009 market bottom IN A MONTH!
Global trade is collapsing. There is no doubt that businesses massively pulled forward orders to beat the administration’s punitive import duties, thus artificially boosting the Q3 GDP numbers.
The chickens will come to roost in Q1 2019 which is what the stock market may be screaming at us right now with its nightmarish price action.
The big print of the week was the Q3 GDP at 3.5%, down substantially from the 4.2% figure for Q2. That may be the last hot number we see for many years as the tax cuts and spending burst wear off. Next year we return to the long-term average of 2.5%...I hope. If I’m wrong we’ll see zero growth in 2019.
Tesla (TSLA) announced a profit for the first time since 2016, sending the shares soaring. The stock is back up to the level that prevailed before Elon Musk’s last nervous breakdown. Tesla 3’s are flooding the streets of California.
In the meantime, the economic data remains hot with Weekly Jobless Claims still hugging an all-time low at 215,000. But it is all backward-looking data.
Of course, the highlight of the week was the Mad Hedge Lake Tahoe Conference which couldn’t have taken place in more ideal conditions. The food was outstanding, the bottles of Caymus cabernet were fast-flowing, and we even had the option of crashing the wedding in the ballroom next door (I saw some incredibly hot distant cousins).
While I lectured away on the prospects for markets and interest rates, children built sandcastles outside on the balmy Tahoe beach 20 feet away. We had a lot of doctors attend this year and I have to admit it was the first time I was offered a colonoscopy in exchange for a newsletter subscription.
Good cheer was had by all and there was a lot of exchanging of trading tips, email addresses, and phone numbers. It is clear the readers are making fortunes with my service. Most have already committed to coming back next year.
My year-to-date performance has faded to a still market-beating 22.37%, and my trailing one-year return stands at 30.68%. October is down -6.02%, despite a gut-punching, nearly instant NASDAQ swoon of 13.7%. Most people will take that in these horrific conditions.
My single stock positions have been money makers, but my short volatility position (VXX), which I put on way too early, was a disaster eating up all of my profits. I bought puts with the (VXX) at $30. It hit an incredible $42 on Friday. That's why you only take on small 5% positions in outright volatility securities.
My nine-year return retreated to 298.84%. The average annualized return stands at 34.58%. Global Trading Dispatch is now only 44 basis points from an all-time high.
The Mad Hedge Technology Letter has done an outstanding job in October, giving back only -0.89% despite having an aggressively long portfolio. It still maintains an impressive annualized 20.31% profit. It almost completely missed the tech meltdown and then went aggressively long our favorite names right at the market bottom.
This coming week will be focused on the trifecta of jobs data and a few blockbuster technology earnings reports.
Monday, October 29 at 8:30 AM, the October Dallas Fed Manufacturing Survey is out.
On Tuesday, October 30 at 9:00 AM, the Corelogic S&P 500 Case-Shiller Home Price Index is released. Facebook (FB) and FireEye (FEYE) report. earnings.
On Wednesday, October 24 at 8:15 AM, the ADP Employment Report is published, a read on private hiring.
At 10:30 AM the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.
Thursday, October 25 at 8:30, we get Weekly Jobless Claims. Apple (AAPL) reports.
On Friday, October 26, at 8:30 AM, the October Nonfarm Payroll Report is announced. The Baker-Hughes Rig Count follows at 1:00 PM.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
October 23, 2018
Fiat Lux
Featured Trade:
(THE CLOUD FOR DUMMIES)
(AMZN), (MSFT), (GOOGL), (AAPL), (CRM), (ZS)
Global Market Comments
October 22, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or HEADING FOR LAKE TAHOE),
(SPY), (TLT), (VIX), (MSFT), (AMZN), (CRM), (ROKU),
(BRING BACK THE UPTICK RULE!)
There’s nothing like a quickie five-day tour of the Southeast to give one an instant snapshot of the US economy. The economy is definitely overheating and could blow up sometime in 2019 or 2020.
Traffic everywhere is horrendous as drivers struggle to cope with a road system built to handle half the current US population. Service has gotten terrible as workers vacate the lower paid sectors of the economy. Everyone you talk to tells you business is great, from the CEOs down to the Uber drivers.
I managed to miss Hurricane Michael by two days. Hartsfield Jackson Atlanta International Airport was busy with exhausted transiting Red Cross workers. The Interstate from Savanna to Atlanta, Georgia was lined with thousands of downed trees. In Houston mountains of debris were evident everywhere, the rotting, soggy remnants of last year’s Hurricane Harvey.
I managed to score all day parking in downtown Atlanta for only $8. I kept the receipt to show my disbelieving friends at home.
Bull markets climb a wall of worry and this one has been no exception. However, the higher we get the greater the demands on the faithful.
Last week saw my Mad Hedge Market Timing Index plunge to an all-time low reading of 4. I back-tested the data and was stunned to discover that October saw the steepest selloff since the 1987 crash, which saw the average crater 21% in one day.
And while evidence of a coming bear market is everywhere, the reality is that stocks can keep rising for another year. Market bottoms are easy to quantify based on traditional valuation measure, but tops are notoriously difficult to call. Look for one more high volume melt up like we saw in January and that should be it.
Real interest rates are still zero (3.2% bond yields – 3.2% inflation), so there is no way this is any more than a short-term correction in a bull market.
The world is still awash in liquidity
The Fed says they’re still raising rates four times in a year no matter what the president says. Look for a 3.25% overnight rate in a year, and 4% for three months funds. If inflation rises to 4% at the same time, real rates will still be at zero.
There certainly has not been a shortage of things to worry about on the geopolitical front. After Saudi Arabia was caught red-handed with video and audio proof of torturing and killing a Washington Post reporter, it threatened to cut off our oil supply and dump their substantial holding of technology stocks.
Tesla made another move towards the mass market by accelerating its release of the $35,000 Tesla 3. Production is now well over 6,000 units a month.
If you had any doubts that housing was now in recession, look no further than the September Existing Home Sales which were down a disastrous 3.5%. In the meantime, the auto industry continues to plumb new depths. In some industries, the recession has already started.
We have been killing it on the trading front. My 2018 year-to-date performance has bounced back to a robust 29.07%, and my trailing one-year return stands at 35.37%. October is up +0.68%, despite a gut-punching, nearly instant NASDAQ swoon of 10.50%. Most people will take that in these horrific conditions.
My single stock positions have been money makers, but my short volatility position (VXX), which I put on early, refuses to go down, eating up much of my profits.
My nine-year return appreciated to 305.54%. The average annualized return stands at 34.58%. Global Trading Dispatch is now only 44 basis points from an all-time high.
The Mad Hedge Technology Letter has done even better, blasting through to a new all-time high at an annualized 26.67%. It almost completely missed the tech meltdown and then went aggressively long our favorite names right at the market bottom.
I’d like to think my 50 years of trading experience is finally paying off, or maybe I’m just lucky. Who knows?
This coming week will be pretty sedentary on the data front, with the Friday Q3 GDP print the big kahuna. Individual company earnings reports will be the main market driver.
Monday, October 22 at 8:30 AM, the Chicago Fed National Activity Index is out. 3M (MMM), and Logitech (LOGI) report.
On Tuesday, October 23 at 10:00 AM, the Richmond Fed Manufacturing Index is published. Juniper Networks (JNPR), Lockheed Martin (LMT), and United Technologies report.
On Wednesday, October 24 at 10:00 AM, September New Home Sales will give another read on entry-level housing. At 10:30 AM the Energy Information Administration announces oil inventory figures with its Petroleum Status Report. Advanced Micro Devices (AMD), Ford Motor (F), and Microsoft (MSFT) report.
Thursday, October 25 at 8:30, we get Weekly Jobless Claims. Alphabet (GOOGL) and Intel (INTC) report.
On Friday, October 26, at 8:30 AM, a new read on Q3 GDP is announced.
The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I am headed up to Lake Tahoe this week to host the Mad Hedge Lake Tahoe Conference. The weather will be perfect, the evening temperatures in the mid-twenties, and there is already a dusting of snow on the high peaks. The Mount Rose Ski Resort is honoring the event by opening this weekend.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 19, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO BUY TICKETS NOW FOR THE MAD HEDGE LAKE TAHOE CONFERENCE FOR OCTOBER 26-27)
(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT)
