Global Market Comments
May 15, 2019
Fiat Lux
(SPECIAL CHINA ISSUE)
Featured Trade:
(WHY CHINA IS DRIVING UP THE VALUE OF YOUR TECH STOCKS)
(QCOM), (AVGO), (AMD), (MSFT), (GOOGL), (AAPL), (INTC), (LSCC)
Tag Archive for: (AVGO)
Reduce the supply on any commodity and the price goes up. Such is dictated by the immutable laws of supply and demand.
This logic applies to technology stocks as well as any other asset. And the demand for American tech stocks has gone global.
Who is pursuing American technology more than any other? That would be China.
Ray Dalio, founder and chairman of hedge fund Bridgewater Associates, described the first punch thrown in an escalating trade war as a “tragedy,” although an avoidable one.
Emotions aside, the REAL dispute is not over steel, aluminum, which have a minimal effect of the US economy, but rather about technology, technology, and more technology.
China and the U.S. are the two players in the quest for global tech power and the winner will forge the future of technology to become chieftain of global trade.
Technology also is the means by which China oversees its population and curbs negative human elements such as crime, which increasingly is carried out through online hackers.
China is far more anxious about domestic protest than overseas bickering which is reflected in a 20% higher internal security budget than its entire national security budget.
You guessed it: The cost is predominantly and almost entirely in the form of technology, including CCTVs, security algorithms, tracking devices, voice rendering software, monitoring of social media accounts, facial recognition, and cloud operation and maintenance for its database of 1.3 billion profiles that must be continuously updated.
If all this sounds like George Orwell’s “1984”, you’d be right. The securitization of China will improve with enhanced technology.
Last year, China’s communist party issued AI 2.0. This elaborate blueprint placed technology at the top of the list as strategic to national security. China’s grand ambition, as per China’s ruling State Council, is to cement itself as “the world’s primary AI innovation center” by 2030.
It will gain the first-mover advantage to position its academia, military and civilian areas of life. Centrally planned governments have a knack for pushing through legislation, culminating with Beijing betting the ranch on AI 2.0.
China possesses legions of engineers, however many of them lack common sense.
Silicon Valley has the talent, but a severe shortage of coders and engineers has left even fewer scraps on which China’s big tech can shower money.
Attempting to lure Silicon Valley’s best and brightest also is a moot point considering the distaste of operating within China’s great firewall.
In 2013, former vice president and product spokesperson of Google’s Android division, Hugo Barra, was poached by Xiaomi, China’s most influential mobile phone company.
This audacious move was lauded and showed China’s supreme ability to attract Silicon Valley’s top guns. After 3 years of toiling on the mainland, Barra admitted that living and working in Beijing had “taken a huge toll on my life and started affecting my health.” The experiment promptly halted, and no other Silicon Valley name has tested Chinese waters since.
Back to the drawing board for the Middle Kingdom…
China then turned to lustful shopping sprees of anything tech in any developed country.
Midea Group of China bought Kuka AG, the crown jewel of German robotics, for $3.9 billion in 2016. Midea then cut German staff, extracted the expertise, replaced management with Chinese nationals, then transferred R&D centers and production to China.
The strategy proved effective until Fujian Grand Chip was blocked from buying Aixtron Semiconductors of Germany on the recommendation of CFIUS (Committee on Foreign Investment in the United States).
In 2017, America’s Committee on Foreign Investment and Security (CFIUS), which reviews foreign takeovers of US tech companies, was busy refusing the sale of Lattice Semiconductor, headquartered in Portland, Ore., and since has been a staunch blockade of foreign takeovers.
CFIUS again in 2018 put in its two cents in with Broadcom’s (AVGO) attempted hostile takeover of Qualcomm (QCOM) and questioned its threat to national security.
All these shenanigans confirm America’s new policy of nurturing domestic tech innovation and its valuable leadership status.
Broadcom, a Singapore-based company led by ethnic Chinese Malaysian Hock Tan, plans to move the company to Delaware, once approved by shareholders, as a way to skirt around the regulatory issues.
Microsoft (MSFT) and Alphabet (GOOGL) are firmly against this merger as it will bring Broadcom intimately into Apple’s (APPL) orbit. Broadcom supplies crucial chips for Apple’s iPads and iPhones.
Qualcomm will equip Microsoft’s brand-new Windows 10 laptops with Snapdragon 835 chips. AMD (AMD) and Intel (INTC) lost out on this deal, and Qualcomm and Microsoft could transform into a powerful pair.
ARM, part of the Softbank Vision Fund, is providing the architecture on which Qualcomm’s chips will be based. Naturally, Microsoft and Google view an independent operating Qualcomm as healthier for their businesses.
The demand for Qualcomm products does not stop there. Qualcomm is famous for spending heavily on R&D — higher than industry peers by a substantial margin. The R&D effort reappears in Qualcomm products, and Qualcomm charges a premium for its patent royalties in 3G and 4G devices.
The steep pricing has been a point of friction leading to numerous lawsuits such as the $975 million charged in 2015 by China’s National Development and Reform Commission (NDRC) which found that Qualcomm violated anti-trust laws.
Hock Tan has an infamous reputation as a strongman who strips company overhead to the bare bones and runs an ultra-lean ship benefitting shareholders in the short term.
CFIUS regulators have concerns with this typical private equity strategy that would strip capabilities in developing 5G technology from Qualcomm long term. 5G is the technology that will tie AI and chip companies together in the next leg up in tech growth.
Robotic and autonomous vehicle growth is dependent on this next generation of technology. Hollowing out CAPEX and crushing the R&D budget is seriously damaging to Qualcomm’s vision and hampers America’s crusade to be the undisputed torchbearer in revolutionary technology.
CFIUS’s review of Broadcom and Qualcomm is a warning shot to China. Since Lattice Semiconductor (LSCC) and Moneygram (MGI) were out of the hands of foreign buyers, China now must find a new way to acquire the expertise to compete with America.
Only China has the cash hoard to take a stand against American competition. Europe has been overrun by American FANGs and is solidified by the first mover advantage.
Shielding Qualcomm from competition empowers the chip industry and enriches Qualcomm’s profile. Chips are crucial to the hyper-accelerating growth needed to stay at the top of the food chain.
Implicitly sheltering Qualcomm as too important to the system is an ink-drenched stamp of approval from the American government. Chip companies now have obtained insulation along with the mighty FANGs. This comes on the heels of Goldman Sachs (GS) reporting a lack of industry supply for DRAM chips, causing exorbitant pricing and pushing up semiconductor companies’ shares.
All the defensive posturing has forced the White House to reveal its cards to Beijing. The unmitigated support displayed by CFIUS is extremely bullish for semiconductor companies and has been entrenched under the stock price.
It is likely the hostile takeover will flounder, and Hock Tan will attempt another round of showmanship after Broadcom relocates to Delaware as an official American company paying American corporate tax. After all, Tan did graduate from MIT and is an American citizen.
The chip companies are going through another intense round of consolidation as AMD (AMD) was the subject of another takeover rumor which lifted the stock. AMD is the only major competitor with NVIDIA (NVDA) in the GPU segment.
The cash repatriation has created liquid buyers with a limited amount of quality chip companies. Qualcomm is a firm buy, and investors can thank Broadcom for showing the world the supreme value of Qualcomm and how integral this chip stalwart is to America’s economic system.
Global Market Comments
August 16, 2018
Fiat Lux
SPECIAL ARTIFICIAL INTELLIGENCE ISSUE
Featured Trade:
(NEW PLAYS IN ARTIFICIAL INTELLIGENCE),
(NVDA), (AMD), (ADI), (AMAT), (AVGO), (CRUS),
(CY), (INTC), (LRCX), (MU), (TSM)
Mad Hedge Technology Letter
July 20, 2018
Fiat Lux
Featured Trade:
(A SELLERS' MARKET)
(CSCO), (MSCC), (GOOGL), (MCHP), (SWKS), (JNPR), (AMAT),
(PANW), (UBER), (AMZN), (AVGO), (QCOM), (CA), (CRM)
I bet you are wondering where all that money from the tax cuts is going.
Believe it or not, the No. 1 destination of this new windfall is technology companies, not just the stocks, but entire companies.
In fact, the takeover boom in Silicon Valley has already started, and it is rapidly accelerating.
The only logical conclusion in 2018 is that tech firms are about to get a lot more expensive. I'll explain exactly why.
The corporate cash glut is pushing up prices for unrealized M&A activity in 2018. U.S. firms accumulated an overseas treasure trove of around $2.6 trillion and the capital is spilling back into the States with a herd-type mentality.
I have chewed the fat with many CEOs about their cash pile road map. All mirrored each other to a T: strategic acquisition and share buybacks, period. The acquisition effect will be felt through all channels of the tech arterial system in 2018.
As the global race to acquire the best next generation technology heats up, domestic mergers could pierce the 400-deal threshold after a lukewarm 2017.
Spend or die.
Apple alone boomeranged back more than $250 billion with hopes of selective mergers and share buybacks. Cisco (CSCO), Microsoft (MSFT), and Google (GOOGL) were also in the running for most cash repatriated.
The tech behemoths are eager to make transformative injections into security, big data, semiconductor chips, and SaaS (service as a software) among others.
Hint: You want to own stocks in all of these areas.
Even non-traditional tech companies are getting in on the act with Walmart concentrating the heart of its strategic future on the pivot to technology.
Walk into your nearest Walmart every few months.
You'll notice major changes and not for decorative measures.
U-turns from legacy technology firms hawking desktop computers and HDD's (Hard Disk Drive) suddenly realize they are behind the eight ball.
M&A activity will naturally tilt toward firms dabbling in earlier-stage software and 5G supported technology. This flourishing trend will reshape autonomous vehicles and IoT (Internet of Things) products.
The dilemma in waiting to splash on a potential new expansion initiative is that the premium grows with the passage of time. Time is money.
It's a sellers' market and the sellers know this wholeheartedly.
Unleashing the M&A beast comes amid a seismic shift of rapid consolidation in the semiconductor sector. Cut costs to compete now or get crushed under the weight of other rivals that do. Ruthless rules of the game cause ruthless executive decisions.
The best way to cut costs is with immense scale to offer nice shortcuts in the cost structure. Buying another company and using each other's dynamism to find a cheaper way to operate is what Microchip Technology's (MCHP) culling of Microsemi Corporation (MSCC) in a deal worth $10bn was about.
Microsemi, based in Aliso Viejo, California, focuses on manufacturing chips for aerospace, military, and communications equipment.
Microchip's focal point is industrial, automobile and IoT products.
Included in the party bag is a built-in $1.8 billion annual revenue stream and more than $300 million of dynamic synergies set to take effect within three years. The bonus from this package is the ability to cross-sell chips into unique end markets opposed to selling from scratch.
Each business hyper-targets different segments of the chip industry and is highly complementary.
Benefits of a relatively robust credit market create an environment ripe for mergers. Some 57% of tech management questioned intend to go on the prowl for marquee pieces to add to their arsenal.
Then we have chip company Broadcom (AVGO) led by CEO Hock Tan, whose entire strategy is based on M&A and minimal capital spending.
His low-quality strategy of buying market share will ultimately fritter out. His lack of capital spending was also a salient reason for blocking Broadcom's purchase of Qualcomm (QCOM), which if stripped of its capital spending budget would have fallen behind China's Huawei to develop critical 5G infrastructure.
Tan's strategy flies in the face of the most powerful tech companies that are using M&A to enhance their products expanding their halo effect around the world.
Gutting innovation and skimming profits off the top is an entirely self-serving, myopic strategy to the detriment of long-term shareholders.
Investors punished Broadcom for it's latest investment of CA Technologies (CA) for $18.9 billion, even though this pickup signals a different tack.
CA Technologies is a leading provider of information technology (IT) management software, which suggests a belated move into the enterprise software market dominated by incumbents such as Salesforce (CRM).
Better late than never.
No need to mince words here as 2018 won't see any discounts of any sort. Nimble buyers should prepare for price wars as the new normal.
Not only are the plain vanilla big cap tech firms dicing up ways to enter new markets, alternative funds are looking to splash the cash, too.
Sovereign wealth funds and private equity firms are ambitiously circling around like vultures above waiting for the prey to show itself.
Private equity firms dove head first into the M&A circus already tripling output for tech firms.
Highlighting the synchronized show of force is none other than Travis Kalanick, the infamous founder of Uber. He christened his own venture capital fund that hopes to invest in e-commerce, real estate, and companies located in China and India.
The new fund is called 10100 and is backed by his own money. All this is possible because of SoftBank CEO Masayoshi Son's investment in Uber, which netted Kalanick a cool $1.4 billion representing Kalanick's 30% stake in Uber.
It is undeniable that valuations are exorbitant, but all data and chip related companies are selling for huge premiums. The premium will only increase as the applications of 5G, A.I., autonomous cars start to pervade deeper into the mainstream economy.
Adding fuel to the fire is the corporate tax cut. The lower tax rate will rotate more cash into M&A instead of Washington's tax coffers enhancing the ability for companies to stump up for a higher bill. Sellers know firms are bloated with cash and position themselves accordingly.
Highlighting the challenges buyers face in a sellers' market is Microsemi Corp.'s (MSCC) purchase of PMC-Sierra Inc. Even though PMC-Sierra had been looking to get in bed with Skyworks Solutions Inc. (SWKS) just before the MSCC merger, PMC-Sierra reneged on the acquisition after (SWKS) refused to bump up its original offer.
(SWKS) manufactures radio frequency semiconductors facilitating communication among smartphones, tablets and wireless networks found in iPhones and iPads.
(SWKS) is a prime takeover target for Apple. (SWKS) estimates to have the highest EPS growth over the next three to five years for companies not already participating in M&A. Apple (AAPL) could briskly mold this piece into its supply chain. Directly manufacturing chips would be a huge boon for Apple in a chip market in short supply.
In 2013, Japan's Tokyo Electron and Applied Materials (AMAT) angled to become one company called Eteris. This maneuver would have created the world's largest supplier of semiconductor processing equipment.
After two years of regulatory review, the merger was in violation of anti-trust concerns according to the United States. (AMAT), headquartered in Santa Clara, California, is a premium target as equipment is critical to manufacturing semiconductor chips. (AMAT) competes directly with Lam Research (LRCX), which is an absolute gem of a company.
Juniper Networks (JNPR) sells the third-most routers and switches used by ISP's (Internet Service Providers). It is also No. 2 in core routers with a 25% market share. Additionally, (JNPR) has a 24.8% market share of the firewall market.
In 2014, Palo Alto Networks (PANW), another takeover target focusing on cybersecurity, paid a $175 million settlement fee for allegedly infringing (JNPR)'s application firewall patents.
In data center security applications, (JNPR) routinely plays second fiddle to Cisco Systems (CSCO). Cisco, the best of breed in this space would benefit by snapping up (JNPR) and integrating its expertise into an expanding network.
Unsurprisingly, health care is the other sector experiencing a tidal wave of M&A, and it's not shocking that health care firms accumulated cash hoards abroad too. The dots are all starting to connect.
Firms want to partner with innovative companies. Companies hope to focus on customer demands and build a great user experience that will lead the economy. Health care costs are outrageous in America, and Jeff Bezos could flip this industry on its head.
Amazon (AMZN) pursuing lower health costs ultimately will bind these two industries together at the hip and is net positive for the American consumer.
Ride-sharing company Uber embarked on a new digital application called Uber Health that book patients who are medically unfit for regular Uber and shuttle them around to hospital facilities.
Health care providers can hail a ride for sick people immediately and are able to make an appointment 30 days in advance. It is a little difficult to move around in a wheel chair, and tech solves problems that stir up zero appetite for most business ventures. Apple is another large cap tech titan keeping close tabs on the health care space.
It's a two-way street with health care companies looking to snap up exceptional tech and vice versa.
It's practically a game of musical chairs.
Ultimately, Tech M&A is the catch of the day, and boosting earnings requires cutting-edge technology no matter how expensive it is. Investors will be kicking themselves for waiting too long. Buy now while you can.
Yes, It's All Going Into Tech Stocks
________________________________________________________________________________________________
Quote of the Day
"Companies in every industry need to assume that a software revolution is coming," - said American venture capitalist Marc Andreessen.
Mad Hedge Technology Letter
April 6, 2018
Fiat Lux
Featured Trade:
(THE IMPLICATIONS OF INTEL'S LOST APPLE CONTRACT),
(INTC), (AAPL), (AVGO), (QCOM), (AMD), (NVDA)
There is plenty of turmoil in chip land these days.
Investors should not freak out, or worse, dump their Intel (INTC) shares on pain of death.
Take a deep breath ... and I'll explain why Intel is still a great stock into which you should dip your toes.
Apple (AAPL) reportedly plans to replace Intel processors in Mac computers with its own proprietary chips starting around 2020. It is useless for investors to prognosticate the worst-case scenario playing out because this announcement will not put Intel out of business.
This is not the first phase of the death of Intel and represents a fabulous entry point into a beacon of tech stability.
Apple started placing Intel CPUs into its MacBook Pro and iMac in 2006 and have enjoyed a fruitful relationship since then.
As technology mutates at lightning speed, Apple justifiably desires more control over its chip design to create the innovative end product it envisions and provide a smoother experience between mobile and desktop devices.
Intel's engineers cannot match the pace of Apple's chip improvements that use ARM-based processors, which Apple has stuck into devices using the iOS system, including the Apple Watch and the Apple TV.
Apple's latest gadgets are more powerful than its past Macs, and its future is better served by tailor-making its chip architecture for its devices.
Security will be bolstered by procuring more control over design construction.
Intel still boasts the world's most popular CPU chip line for laptops and desktop computers, and hyper-increasing global demand for silicon chips will fail to disrupt Intel's growth trajectory.
Remember that the CPU chip line is Intel's legacy business, and this lump of the operation will slowly fade away into oblivion anyway.
Apple's top-end computers will still use Intel's chips such as the iMac Pro and Mac Pro revision until they can transition to in-house chips.
This trend has staying power with Apple designing its own iPhone chips partially due to removing its heavy reliance on Qualcomm (QCOM). It also has locked horns in court for years adding tension to the relationship.
On a relative basis, iMacs are just a fragment of the overall laptop market at 7.3% during the fourth quarter of 2017.
Apple's announcement could shed $1.8 billion in annual gross profit from Intel's earnings.
Intel accumulated $62.8 billion in sales in 2017, and losing Apple's business is only a small hiccup in the bigger scheme of things.
In late 2017, Intel poached the former head of AMD's (AMD) graphics business to head up a new high-end graphics division.
Raja Koduri, the new chief architect and senior vice president of the newly formed Core and Visual Computing division at Intel, will enable the company to directly compete with AMD and Nvidia (NVDA) in the GPU market.
The competition with AMD is a big deal because AMD has caught up with Intel and could steal CPU market share.
AMD has built its own comprehensive lineup of PC CPU chips while Intel unveiled its eighth generation Core processors on April 3.
Acquiring new segments with its cash hoard is another way to move forward.
Rumors were rife with reports suggesting Intel would acquire Broadcom (AVGO) to create the biggest chip maker in the world.
This was a defensive maneuver to combat the possible combination of a Broadcom-Qualcomm merger that would damage Intel's market share in chips for mobile phones and cars.
By getting into bed with Broadcom, Intel could scrap the construction of the world's third-largest chipmaker, after Intel itself and Korea's Samsung.
Altera and Mobileye are companies Intel added to its lineup using its egregiously large cash hoard.
Mobileye, an Israeli company, provides advanced driver assistance software that prevents collisions. This purchase clearly bolsters its autonomous vehicle technology division.
Altera, a San Jose, Calif.-based company, manufactures integrated circuits.
Intel is likely to remain the dominant force at the very high end of computing.
It would be foolish to only analyze Intel based on its legacy business as it has veered into a different growth mode and is not just a chip company anymore.
Intel has been weaning itself from the secular downtrend of computer chips and strategically established an unmovable position in the massive cloud data center and server business.
The Data Center Group, Intel's second largest segment and most vital, grew 20% YOY, with $5.6 billion in revenue. Investors must keep close tabs on how this area performs because it is the lynchpin to emerging technologies such as artificial intelligence and 5G in terms of overall infrastructure.
Intel's data center performance represents the harbinger of success, and Intel is doubling down on this future growth driver.
Cloud capital expenditures will rise 30 percent in 2018 because chunks of money must be thrown at this segment to stay relevant from cutthroat competition.
Computing is at an inflection point in 2018. Priorities have rotated to the data-centric phase of development. And Intel's CEO Brian Krzanich, who just received a nice pay rise to $21.5 million per year, will fill us in at Intel's next earnings call on April 26.
To visit Intel's website please click here.
__________________________________________________________________________________________________
Quote of the Day
"Quality is much better than quantity. One home run is much better than two doubles." - said former Apple CEO, Steve Jobs in 2006.
Global Market Comments
March 28, 2018
Fiat Lux
Featured Trade:
(FRIDAY, APRIL 6, INCLINE VILLAGE, NEVADA, STRATEGY LUNCHEON)
(FROM THE FRONT LINES OF THE TRADE WAR),
(AAPL), (AVGO), (QCOM), (TLT),
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM TRIPLED MY PERFORMANCE)
Poke your hand into a hornet's nest and you can count on an extreme reaction, a quite painful one.
As California is the growth engine for the entire US economy, accounting for 20% of US GDP, it is no surprise that it has become the primary target of Chinese retaliation in the new trade war.
The Golden State exported $28.5 billion worth of products to China in 2017, primarily electronic goods, with a host of agricultural products a close second.
In the most devious way possible, the Middle Kingdom targeted Trump supporters in the most liberal state in the country with laser-like focus. California exports 46% of its pistachios to China, followed by 35% of its exported plums, 20% of exported oranges, and 12% of its almonds.
By comparison, California imported a gargantuan $160.5 billion worth of goods from China last year, mostly electronics, clothing, toys, and other low-end consumer goods.
Some $16 billion of this was recycled back into the state via investment in real estate and technology companies.
Anecdotal evidence shows that figure could be dwarfed by the purchase of California homes by Chinese individuals looking for a safe place to hide their savings. Local brokers report that up to one-third of recent purchases have been by Chinese nationals paying all cash.
The Chinese tried to spend more. Their money is thought to be behind Broadcom's (AVGO) $105 billion bid for QUALCOMM (QCOM), which was turned down for national security reasons.
The next big chapter in the trade war will be over the theft of intellectual property, and that one will be ALL about the Golden State.
Also at risk is virtually Apple's (AAPL) entire manufacturing base in China, where more than 1 million workers at Foxconn assemble iPhones, Macs, iPads, and iPods.
The Cupertino, CA, giant could get squeezed from both sides. The Chinese could interfere with its production facilities, or its phones could get slapped with an American import duty.
So far, the trade war has been more bluff than bite. The US duties announced come to only $3 billion on $50 billion worth of trade. China responded with incredible moderation, only restricting $3 billion worth of imports.
By comparison, in 2017 the US imported a total of $505.6 billion in goods from China and exported $130.4 billion. Against this imbalance, the US runs a largest surplus in services.
The next Chinese escalation will involve a 25% tariff on American pork and recycled aluminum. Who is the largest pork producer in the US? Iowa, with $4.2 billion worth, and the location of an early presidential election primary.
Beyond that, Beijing has darkly hinted that is will continue to boycott new US Treasury bond auctions, as it has done for the past six months, or unload some if its massive $1.6 trillion in bond holdings.
Given the price action in the bond market today, with the United States Treasury Bond Fund (TLT) at a two-month high, I would say that the market doesn't believe that for two seconds. The Chinese won't cut off its nose to spite its face.
In the end, I think not much will come of this trade war. That's what the stock market told us yesterday with a monster 700-point rally, the biggest in three years.
The administration is discovering to its great surprise that its base is overwhelmingly against a trade war. And as business slows down, it will become evident in the numbers as well.
The US was the big beneficiary from the global trading system. Why change the rules of a game we are winning?
Still, national pride dies hard.
