(BABA) Archives - Page 14 of 17 - Mad Hedge Fund Trader

The Best Tech Stock You’ve Never Heard of

If you asked me which is the best company that most people do not know about then there is one clear answer.

The Trade Desk (TTD).

This company was founded by one of the pioneers of the ad tech industry Jeff Green, and he has spent the past 20 years improving data-based digital advertising.

Green established AdECN in 2004 and its claim to fame was the world’s first online ad exchange.

After three years, Microsoft gobbled up this firm and Green stayed on until 2009 when he launched The Trade Desk. This is where he planned to infuse everything he learned about the digital ad agency into his own brainchild.

Green concluded that creating a self-service platform, avoiding privacy issues, and harnessing big data for digital ad campaigns was the best route at the time.

Green hoped to avoid the pitfalls that damaged the digital ad industry mainly bundling random ads together that diluted the quality and potency of the ad campaigns.

It did not make sense that a digital ad for baby diapers could be commingled with an ad for retirement homes.

Green created real-time bidding (RTB), which is a process in which an ad buyer bids on a digital ad and, if won, the buyer’s ad is instantly displayed on the selected site.

This revolutionary method allowed ad buyers to optimize ad inventory, prioritize ad channels, and boost the effectiveness of campaigns.

(RTB) is a far better way to optimize digital ad campaigns than static auctions, which group ads by the thousand.

In real time, advertisers are able to determine a bespoke ad for the user to display on a website. Green used this model to develop his company by building a platform tailor-made to execute (RTB).

Naturally, he won over many naysayers and his company took off like a rocket.

Results, in a results-based business, were seen right away by ad buyers.

A poignant example was aiding a performance-based ad agency in trimming ad waste by more than 50% for a national fast food chain with thousands of locations across America.

It took just one year for The Trade Desk to carve out a profitable business as ad agencies flocked to its platform desiring to take advantage of (RTB) or also commonly known as programmatic advertising.

Customer satisfaction is evident in its client retention rate of 95% for the past few years highlighting the dominating position The Trade Desk possesses in the digital ad industry.

The Trade Desk has not raised fees for ad buyers lately, but the value added from The Trade Desk to customers is accelerating at a brisk pace.

A great value proposition for potential clients.

The vigor of the business was highlighted when Green cited that each second his company is “considering over 9 million ad opportunities” for their ad inventory shows how The Trade Desk is up to date on almost every single ad permutation out there.

This speaks volume of the ad tech, which is the main engine powering the bottom lines at Google search and rogue ad seller Facebook (FB).

Google only gets 63,000 searches per second and shows that The Trade Desk has pushed the envelope in providing the best platform for ad buyers to seek its perfect audience.

Green’s mission of supporting big ad buyers optimize their ad budget has really caught fire and in a way that is completely transparent and objective.

The foundations that Green has assembled became even more valuable when Alphabet (GOOGL) chose to remove DoubleClick IDs, which would now prevent ad buyers from cross-platform reporting and measurement.

Previously, DoubleClick ID could cull data from assorted ads and online products based on a unique user ID named DoubleClick ID.

Ad purchasers then would data transfer to pull DoubleClick log files and measure them against impressions served from other ad servers across the web.

Effectively, ad buyers could track the user through the whole ad process and determine how useful an ad would be to that specific user.

In an utter conservative move to satisfy Europe’s General Data Protection Regulation (GDPR), DoubleClick IDs are no longer available for use, and tracking the ad inventory performance from start to finish became much harder.

Cutting off the visibility of the DoubleClick ID in the DoubleClick ecosystem was a huge victory for The Trade Desk because DoubleClick ID measured 75% of the global ad inventory.

Ad buyers would be forced to find other measurement systems to help calculate ad performance.

Branding and executing as the transparent and fair ad platform helping ad agencies was a great idea in hindsight with the world becoming a great deal more sensitive to data privacy.

The Trade Desk is perfectly placed to reap all the benefits and boast excellent technology to capitalize on this changing big data landscape. It is already seeing this happen with new business wins including large global brands such as a major food company, a global airline, and another large beverage company.

The global digital ad market is a $700 billion market today and trending toward $1 trillion in the next five to seven years

The generational shift to mobile and online platforms will invigorate The Trade Desk’s bottom line as more big ad buyers will make use of its proprietary platform to place programmatic ads.

Content distribution systems are fragmenting into skinny bundles hyper-targeting niche content users such as Sling TV, FuboTV, and Hulu.

There are probably 30 different ways to watch ESPN now, and these 30 platforms all require ad placement and optimization.

Some of the names The Trade Desk is working with are the who’s who of digital content ownership or distribution including Baidu (BIDU), Google, Alibaba (BABA), Pandora (P), and Spotify (SPOT) -- and the names are almost endless.

It’s the Wild West of ads and content these days because TV distribution has never been more fragmented.

Content creation avenues are desperate to boost ad income and are increasingly attempting to go direct to consumers.

Ad-funded Internet TV barely existed a few years ago. And ad inventory is all up for grabs benefitting The Trade Desk.

All of this explains why the stock is up more than 180% in 2018, and this is just the beginning.

The growth numbers put Amazon (AMZN) and Netflix (NFLX) to shame.

The Trade Desk scale on inventory has spiked by more than 700% YOY.

The option to hyper-target increases as more ad inventory is stocked.

Management mentioned in its second-quarter performance that “nearly everything went right. We executed well and one of the most dynamic environments we've seen.”

It is one of the most bullish statements I have heard from a public company.

Quarterly revenue ballooned 54% YOY to a record $112 million, and the 54% YOY growth equaled the 54% YOY growth in Q2 2017.

Ad Age's top 50 worldwide advertisers doubled ad spend in the past year positioning The Trade Desk for continued hyper-growth, not only for 2018 but in 2019 and beyond.

Mobile spend jumped nearly 100% YOY, accounting for 45% of ad spend on the platform, which is 400% higher than the industry average for mobile ad spend according to eMarketer.

Data spend was also a huge winner rising by nearly 100% smashing another record.

In the meantime, the overseas business continued its robust growth in Europe and Asia, up 85% YOY.

The Trade Desk confidence in its performance chose to increase guidance to $456 million for the year, a 48% YOY improvement.

When upper management says “when we see surprises, they typically are to the upside” you take notice, because this tech company is perfectly placed in a growth sweet spot.

Massive developing markets are just starting to dabble with programmatic advertising. Markets such as China will see it become the new normal soon, opening up even more business for The Trade Desk.

The Trade Desk is also rolling out new products that will automate more of the process and reduce the number of clicks.

Wait for the pullback to get into this ad tech stock because even though it is up big this year, we are still in the early innings, and shares will march even higher.

________________________________________________________________________________________________

Quote of the Day

“I have a deep respect for the fundamentals of television, the traditions of it, even, but I don't have any reverence for it,” – said Netflix chief content officer Ted Sarandos.

August 27, 2018

Tech Letter

Mad Hedge Technology Letter
August 27, 2018
Fiat Lux

Featured Trade:
(WHY ALIBABA IS THE FIRST STOCK TO BUY WITH THE OUTBREAK OF TRADE PEACE),
(BABA), (GOOGL), (AMZN), (YELP), (MSFT), (MU), (ZTE), (HUAWEI)

Why Alibaba is the First Stock to Buy with the Outbreak of Trade Peace

Tech Letter

According to the government agency, China Internet Network Information Center, the Chinese Internet community has surpassed 802 million, which only represents a 57.7% penetration rate, miles behind the 89% penetration rate in America.

The gargantuan scale of the Chinese Internet world means China has three times as many Internet users than America, and this is a big deal.

The additional 30 million added to the Chinese Internet ecosphere in the first half of 2018 shows the scale in which local Chinese tech companies are playing with and use to their clear-cut advantage.

Ostensibly, most business strategies in China revolve around scaled tactics as the backbone to operations.

There is even more room to expand in the Middle Kingdom and one clear victor sits atop the parapet looking at the riffraff below and that is Chinese Internet conglomerate Alibaba (BABA).

Alibaba, led by Chinese Internet pioneer Jack Ma, posted its highest-performing growth quarter in the past four years.

Total quarterly revenue ballooned an incredible 61% YOY to $11.8 billion, highlighting the dominant position Alibaba possesses in the Chinese e-commerce landscape.

If you want to know what Amazon (AMZN) is going to do next watch Alibaba.

Profit margins were somewhat sacrificed in the process because of M&A activity that saw Alibaba move into the physical supermarket business snapping up 35 Hema supermarket locations then reinvesting into the business. Echoes of Whole Foods?

Alibaba did not stop there, funneling another $3 billion into food delivery app ele.me, which plans to merge its operations with Yelp (YELP) lookalike app Koubei.

If you thought Silicon Valley moves at a rapid pace, the Chinese Internet space moves faster than lighting.

Alibaba last year dipped into the retail segment as well pocketing a department store chain with 29 stores along with 17 shopping malls.

Alibaba is the closest replica the world has to Amazon and thus is an ideal barometer of the health of the overall Chinese consumer and a peek under the complicated hood that is the Chinese economy.

Alibaba also provides onlookers at how China and its Internet behemoths are coping with the global trading war that has invaded the news headlines from its outset.

The short answer to all this is that China is coping quite well and by no means is ready to back down.

Indeed, there will be peripheral pressures exerted from the fringes, but the core engines remain intact and Chairman Xi can fall asleep in his Beijing abode more than peacefully.

A reason for the stalemate between the two governments is that both are quietly confident they have the levers in place to absorb whatever Molotov cocktails the other has to throw at them.

Investors would be mad to dismiss China’s capabilities after experiencing a mesmerizing economic rise enriching hundreds of millions of Chinese nationals that can be found comfortably living in western megacities in luxury real estate often with a real estate portfolio dotted around the world.

Alibaba’s management made it known on the earnings report that it is not worried much about the trade war because it is largely focused on the domestic Chinese consumer, which has been one of the best economic stories of the past decade.

The overseas expansion unfolding under Alibaba’s tutelage is away from the western world and predominantly focused on Southeast Asia and Eastern Europe where cheap, value-for-money hardware and software allows citizens at these income levels to participate in the e-commerce game.

These individuals can’t afford iPhones on a salary of peanuts. And Alibaba has targeted the undeveloped world as a potential lever of substantial growth.

The regulatory harshness of the west has shut out Huawei and ZTE from its shores. Australia followed suit as well, banning the two telecom companies even though it enjoys a better relationship with Beijing than Europe or North America.

China has already planned a workaround because the engines driving the Chinese tech miracle are semiconductor companies such as Micron (MU), which sells boatloads of DRAM memory chips to Chinese tech companies that flood the world with smartphones and other gadgets.

Beijing has already formulated a plan to circumvent American chips by tapping Korean, European, and Japanese chips to replace the current American supply that could vanish at any time.

Shenzhen-based chip company HiSilicon fully owned by Huawei is responsible for supplying Huawei with chips and is the biggest local designer of integrated circuits in China.

This is what the future of China looks like when China can finally build up the adequate supply necessary to achieve its plans to dominate global technology, America, and the world.

But the plan is still in the process of playing out. The awkwardness was highly visible when the administration’s ban of selling U.S. manufactured components to telecommunications company ZTE resulted in the company almost shutting down until a last-second change of heart by the administration.

The near-death experience will invigorate ZTE to muster its own local supply of chips to avoid the unreliable foreign supply and a deja vu feeling.

American chip companies won’t be able to enjoy the Chinese market for long as all these negative experiences for Chinese companies has forced Chinese tech companies to search and secure a guaranteed chip supply.

At the same time, Chinese local smartphone players have gone from 0 to 60 in no time with companies that barely existed a few years ago, such as Oppo, Vivo coming into the fore along with Huawei picking up 43% of the global smartphone market.

This is bad news for Apple as local competitors are learning fast and furious how to build premium smartphones via re-engineering the current technology or through forced technology transfers.

These companies subsequently offer these phones at the lowest possible price point. And at some point in the near future Apple could be expendable if Chinese smartphones start to display the type of quality the best phones show.

Chinese domestic consumption and investment comprise 90% of the GDP growth in China and are propped up by three robust trends including real wage growth boosting the middle-class population, high savings rate that of which Americans would be jealous, and easy access to credit vehicles.

When I was recently in the Middle Kingdom, it was highly evident that as the generations became younger, their quality of life was higher than their parents.

The opposite is happening in America with millennials earning demonstrably less than their parents’ generation while the American middle class is shrinking at an accelerated pace.

Beijing knows this and hopes to wait things out as it feels time is a positive variable for China and not America.

It is true that if this trade war took place in 20 years in the future, China would be in a stronger strategic position to extract whatever concessions it desires because even though Chinese growth is slowing, it is still growing at 6.5%.

And if you don’t believe what I just said then just look at Alibaba’s cloud division, which grew 93% YOY opening artificial intelligence-based data centers around Europe to battle Amazon (AMZN) and Microsoft (MSFT).

Europe was once Elysian Fields for American tech companies, but with European regulators going after American tech and China encroaching on European turf, the future looks a lot less certain for the FANGs there than ever before.

Alibaba’s operating margins dipped 10% YOY but the slide will be returned to shareholders in the future in the form of high-quality revenue and is worth the investment into the most innovative ideas of tomorrow.

I did not even mention the large stake Alibaba has in Ant Financial, which operates the ubiquitous digital payment app Alipay.

It would be analogous to Amazon if it owned Visa.

Alibaba is one of the best tech companies in the world headed by a former Chinese English language teacher in Hangzhou.

If America becomes too difficult or expensive with which to do business, Alibaba and Chinese tech will just recalibrate their strategy to deeper infiltrate the confines of Southeast Asia and the rest of the undeveloped world.

Any price war on undeveloped soil favors the Chinese as they have mastered scale better than anyone on the planet.

The stellar Alibaba numbers also mean the trade war has no end in sight as each player thinks they have the upper hand. But it also means the tech giants from both countries will come out unscathed and will lead their country’s respective equity markets higher for the foreseeable future.

The Jeff Bezos of China – Alibaba’s Jack Ma

________________________________________________________________________________________________

Quote of the Day

“Technology is nothing. What's important is that you have a faith in people, that they're basically good and smart, and if you give them tools, they'll do wonderful things with them,” – said Apple cofounder and former CEO Steve Jobs.

August 24, 2018

Diary, Newsletter, Summary

Global Market Comments
August 24, 2018
Fiat Lux

Featured Trade:
(AUGUST 22 BIWEEKLY STRATEGY WEBINAR Q&A),
(BIDU), (BABA), (VIX), (EEM), (SPY), (GLD), (GDX), (BITCOIN),
(SQM), (HD), (TBT), (JWN), (AMZN), (USO), (NFLX), (PIN),
(TAKING A BITE OUT OF STEALTH INFLATION)

August 22 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader August 22 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.

As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!

Q: How do you think the trade talks will resolve?

A: There will be no resolution this next round of trade talks. China has sent only their most hawkish negotiators who believe that China has done nothing wrong, so don’t expect results any time soon.

Also, because of the arrests in Washington, China is more inclined to just wait out Donald Trump, whether that’s 6 months or 6 1/2 years. They believe they have the upper hand now, sensing weakness in Washington, and in any case, many of the American requests are ridiculous.

Trade talks will likely overhang the market for the rest of this year and you don’t want to go running back into those China Tech plays, like Alibaba (BABA) and Baidu (BIDU) too soon. However, they are offering fantastic value at these levels.

Q: Will the Washington political storm bring down the market?

A: No, it won’t. Even in the case of impeachment, all that will happen is the market will stall and go sideways for a while until it’s over. The market went straight up during the Clinton impeachment, but that was during the tail end of the Dotcom Boom.

Q: Is Alibaba oversold here at 177?

A: Absolutely, it is a great buy. There is a double in this stock over the long term. But, be prepared for more volatility until the trade wars end, especially with China, which could be quite some time.

Q: What would you do with the Volatility Index (VIX) now?

A: Buy at 11 and buy more at 10. It’s a great hedge against your existing long portfolio. It’s at $12 right now.

Q: Are the emerging markets (EEM) a place to be again right now or do you see more carnage?

A: I see more carnage. As long as the dollar is strong, U.S. interest rates are rising, and we have trade wars, the worst victims of all of that are emerging markets as you can see in the charts. Anything emerging market, whether you’re looking at the stocks, bonds or currency, has been a disaster.

Q: Is it time to go short or neutral in the S&P 500 (SPY)?

A: Keep a minimal long just so you have some participation if the slow-motion melt-up continues, but that is it. I’m keeping risks to a minimum now. I only really have one position to prove that I’m not dead or retired. If it were up to me I’d be 100% cash right now.

Q: Would you buy Bitcoin here around $6,500?

A: No, I would not. There still is a 50/50 chance that Bitcoin goes to zero. It’s looking more and more like a Ponzi scheme every day. If we do break the $6,000 level again, look for $4,000 very quickly. Overall, there are too many better fish to fry.

Q: Is it time to buy gold (GLD) and gold miners (GDX)?

A: No, as long as the U.S. is raising interest rates, you don’t want to go anywhere near the precious metals. No yield plays do well in the current environment, and gold is part of that.

Q: What do you think about Lithium?

A: Lithium has been dragged down all year, just like the rest of the commodities. You would think that with rising electric car production around the world, and with Tesla building a second Gigafactory in Nevada, there would be a high demand for Lithium.

But, it turns out Lithium is not that rare; it’s actually one of the most common elements in the world. What is rare is cheap labor and the lack of environmental controls in the processing.

However, it’s not a terrible idea to buy a position in Sociedad Química y Minera (SQM), the major Chilean Lithium producer, but only if you have a nice long-term view, like well into next year. (SQM) was an old favorite of mine during the last commodity boom, when we caught a few doubles. (Check our research data base).

Q: How can the U.S. debt be resolved? Or can we continue on indefinitely with this level of debt?

A: Actually, we can go on indefinitely with this level of debt; what we can’t do is keep adding a trillion dollars a year, which the current federal budget is guaranteed to deliver. At some point the government will crowd out private borrowers, including you and me, out of the market, which will eventually cause the next recession.

Q: Time to rotate out of stocks?

A: Not yet; all we have to do is rotate out of one kind of stock into another, i.e. out of technology and into consumer staple and value stocks. We will still get that performance, but remember we are 9.5 years into what is probably a 10-year bull market.

So, keep the positions small, rotate when the sector changes, and you’ll still make money. But, let's face it the S&P 500 isn’t 600 anymore, it’s 2,800 and the pickings are going to get a lot slimmer from here on out. Watch the movie but stay close to the exit to escape the coming flash fire.

Q: What kind of time frame does Amazon (AMZN) double?

A: The only question is whether it happens now or on the other side of the next recession. We can assume five years for sure.

Q: More upside to Home Depot (HD)?

A: Absolutely, yes. The high home prices lead to increases in home remodeling, and now that Orchard Hardware has gone out of business, all that business has gone to Home Depot. Home Depot just went over $204 a couple days ago.

Q: Do you still like India (PIN)?

A: If you want to pick an emerging market to enter, that’s the one. It’s a Hedge Fund favorite and has the largest potential for growth.

Q: What about oil stocks (USO)?

A: You don’t want to touch them at all; they look terrible. Wait for Texas tea to fall to $60 at the very least.

Q: What would you do with Netflix (NFLX)?

A: I would probably start scaling into buy right here. If you held a gun to my head, the one trade I would do now would be a deep in the money call spread in Netflix, now that they’ve had their $100 drop. And I can’t wait to see how the final season of House of Cards ends!

Q: If yields are going up, why are utilities doing so well?

A: Yields are going down right now, for the short term. We’ve backed off from 3.05% all the way to 2.81%; that’s why you’re getting this rally in the yield plays, but I think it will be a very short-lived event.

Q: Do you see retail stocks remaining strong from now through Christmas?

A: I don’t see this as part of the Christmas move going on right now; I think it’s a rotation into laggard plays, and it’s also very stock specific. Stocks like Nordstrom (JWN) and Target (TGT) are doing well, for instance, while others are getting slaughtered. I would be careful with which stocks you get into.

Good luck and good trading
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader

August 13, 2018

Tech Letter

Mad Hedge Technology Letter
August 13, 2018
Fiat Lux

Featured Trade:
(GOOGLE'S NEW CHINESE PLAY),
(GOOGL), (BABA), (AAPL), (JD), (BIDU), (MU), (INTC)

Google's New Chinese Play

Tech Letter

As a bolt from the blue, Google search is headed back to China.

The project coined Dragonfly commenced in early 2017 as Google sought a way back into the lucrative Chinese market to sell its products.

The retracement to China then later sped up after Google CEO Sundar Pichai secretly met with a top Chinese official in December 2017.

The censored Google search application could be launched in the next six months to a year upon approval from the communist party.

Why China?

There are three times more smartphones in China than in the U.S. This market represents celestial scale unfounded in any other country.

The Chinese Internet population has roughly 772 million people with Internet penetration levels at about 55%.

The U.S. has maxed out its penetration level at 89% and there is little room to snatch up a new group of mass users. This is not the case in China, which has ample amounts of room to run.

In addition, Google hopes to roll out a news aggregation app mirrored on Chinese newsfeed app Jinri Toutiao that implements personalized artificial intelligence to cater toward each unique user's needs.

As of December 2017, users spent an average of 73 minutes per day on this app.

Jinri Toutiao has 120 million daily active users and has been given a valuation of around $35 billion.

The unbridled potential for American large cap tech companies in China is unrivaled.

But navigating around China's murky business environment under the comprehensive controls of the Great Firewall has proved cumbersome highlighting the executional prowess of Apple's (AAPL) iPhone business in China.

Why did Google leave in the first place?

The issue of censorship was the catalyst leading Google search to the exits.

Google was stunned by the exploits of the Chinese communist government, which maneuvered around Google's system targeting human rights activists among other things.

Operating abroad, companies do not always have complete control over the systems they build and the business processes that revolve around it.

Beijing continued to press Google to filter its search results in 2010, and anything but compliance spelled doom for Google's future in China.

Restricting speech is commonplace for many undeveloped countries with brutal regimes.

The U.S. has one of the most lenient free press laws in the world underlying the backbreaking hassle of operating in a country that actively and aggressively suppresses free speech deemed negative to the people in powerful positions.

After Google started rerouting mainland Chinese Google search to its filter-less Hong Kong servers, Google search was unceremoniously shut down within months.

A comeback is in the works at a time when China and America are at each other's throats in a tit-for-tat trade war, complicating the move to reinsert itself back in the Middle Kingdom.

Let's make no bones about it, this is a high-risk, high-reward strategy for Alphabet, which seeks to add yet another growth driver to its profit-making machine.

Out of the FANG group, only Apple has emerged to unlock the Chinese market with outstanding success.

All other American tech competition was rooted out. Only chip names such as Micron (MU) and Intel (INTC) latched onto the Chinese market largely because of the Chinese demand for chips.

This unfortunate development opened the path for the BATs to dominate in China, which is comprised of Baidu (BIDU), Alibaba (BABA), and Tencent.

Rewind back to 2010, Google search was directly competing against China's Baidu headed up by founder Robin Li.

Google had just 14% market share in search and was trailing far behind Baidu, which had 79% of market share.

In 2010, the difference in the quality of the search algorithms between the two couldn't have been larger.

When comparing these search engines, 85% of Google searches would populate vastly different results compared to Baidu's search platform.

Upon further inspection, Google search was deemed far more accurate than the market share leader Baidu, and that has not changed.

China's inferior technological abilities are well noted. The shortage of talent has forced them to institute forced technological transfers from western companies working in China, outright theft of technical know-how by state sponsored hackers, and the use of government loans to finance M&A activity in technological advanced countries.

In fact, Google leaving China robbed the Chinese tech sector of legitimate competition crushing the innovation trajectory or any remnants of one.

This led to the BATs running riot making money hand over fist but still trailing American tech by a country mile in terms of technical ability and innovation.

A lack of competition breeds complacency.

The reintegration of Google search into China will bring a whole new level of top-class ad technology into China.

This could be the beginning of a monumental ramp up in digital ad spend in China, which trails far behind North America and Europe in average revenue per person.

Discretionary spending is robust in China and advertisers want a piece of the action.

As much as this could be an opportunity for Alphabet to invigorate its cash-making enterprise, it is also a chance to enhance the overall Chinese tech sector.

Upon hearing Google will return, Baidu's Li laid down the gauntlet retorting that Baidu will "win one more time."

Having the communist party on your side as a tag team partner goes a long way in China and has been the main reason of foreign firms fleeing in droves in the past.

Alphabet won't have the same help.

Yet, it could learn a great deal from heading into this sensitive opportunity that could also lay the groundwork to operate in other countries with repressive governments bent on destroying freedom of speech.

Naturally, Alphabet employees weren't impressed with this new direction.

Silicon Valley is centered on left-wing social mores and adjusting its model to accommodate a totalitarian regime does not sit well with many workers.

Google saw a mini employee revolt because of Project Maven, a national defense program marrying artificial intelligence with combat operations in the United States.

Allowing Google's technology to possibly fall into the hands of Beijing would be unforgivable and a national embarrassment.

This idea is definitely not part of the low hanging fruit initiative.

This fruit is 20 feet high dangling from a distant branch.

If Alphabet pulls this off, it could add another surging driver to its portfolio, which prints money because of its digital ad segment.

It could potentially increase revenue by 30%.

Alphabet's successfully bringing in its Google search engine back from the cold, albeit censored search engine, could lay the groundwork for other American tech companies to enter the Chinese market, which would crush Alibaba, JD.com (JD), Tencent, and Baidu's share price.

Baidu dropped more than 6% upon this announcement.

The tech expertise level would naturally rise in China if American tech companies were permitted to set up shop, enhancing the total Chinese tech sector.

It would also apply pressure on China's communist government to open up its industries and do away with the protectionist stance that has been a bedrock policy fueling China's unbelievable rise from rags to riches.

China's top-level politicians must understand inward policies of this ilk do not mesh with the status of a country that is the world's second biggest economy. And it was only a matter of time before unyielding backlash ensued.

From the political side, it could possibly offer additional ammunition to the American administration if China wholeheartedly rejects Google's foray into the mainland, even if it complies with every miniscule, arcane rule Beijing throws at them.

It will prove that China is not willing to compromise or make a deal with the deal-obsessed American administration. And it will signal a dead-end road for any large cap American tech company with China aspirations.

The U.S. administration would use this as an "I told you so" moment, highlighting a history of perpetual unfair trade practices. Hopefully, it never gets to this point.

As it stands, many American large cap tech companies won't touch the Chinese market with a 10-foot pole, but the breathless scale is hard to pass up for others.

If Google is stonewalled, expect an even tougher response from the American administration hell-bent on preventing technological transfers to China.

Currently, the Committee on Foreign Investment in the United States (CFIUS) is attempting to recreate the rules to counteract the China threat.

The trade war is ultimately about global supremacy and being able to harness the biggest tool to achieve world hegemony, which is high caliber technology.

The treatment of Chinese and American tech companies by each other's government will give investors deep insight into how this all plays out.

This is Alphabet's last gasp chance at entering China. If it evolves into a spectacular failure, it always has its digital ad business to fall back on and the upcoming mass rollout of Waymo, its autonomous self-driving taxi business.

So why not take a stab at it?

________________________________________________________________________________________________

Quote of the Day

"If Google re-enters the market, it gives us the opportunity to player kill with real swords and spears and win one more time," - said founder and CEO of Baidu Robin Li.

July 11, 2018

Tech Letter

Mad Hedge Technology Letter
July 11, 2018
Fiat Lux

Featured Trade:
(MASAYOSHI SON'S VISION TO TAKE OVER THE WORLD),
(SFTBY), (BABA), (NVDA)

July 5, 2018

Tech Letter

Mad Hedge Technology Letter
July 5, 2018
Fiat Lux

Featured Trade:
(THE HIGH COST OF DRIVING OUT OUR FOREIGN TECHNOLOGISTS),
(EA), (ADBE), (BABA), (BIDU), (FB), (GOOGL), (TWTR)

The High Cost of Driving Out Our Foreign Technologists

Tech Letter

There is only so much juice you can squeeze from a lemon before nothing is left.

Silicon Valley has been focused mainly on squeezing the juice out of the Internet for the past 30 years with intense focus on the American consumer.

In an era of minimal regulation, companies grew at breakneck speeds right into families' living quarters and it was a win-win proposition for both the user and the Internet.

The cream of the crop ideas was found briskly, and the low hanging fruit was pocketed by the venture capitalists (VCs).

That was then, and this is now.

No longer will VCs simply invest in various start-ups and 10 years later a Facebook (FB) or Alphabet (GOOGL) appears out of thin air.

That story is over. Facebook was the last one in the door.

VCs will become more selective because brilliant ideas must withstand the passage of time. Companies want to continue to be relevant in 20 or 30 years and not just disintegrate into obsolescence as did the Eastman Kodak Company, the doomed maker of silver-based film.

The San Francisco Bay Area is the mecca of technology, but recent indicators have presaged the upcoming trends that will reshape the industry.

In general, a healthy and booming local real estate sector is a net positive creating paper wealth for its local people and attracting money slated for expansion.

However, it's crystal clear the net positive has flipped, and housing is now a buzzword for the maladies young people face to sustain themselves in the ultra-expensive coastal Northern California megacities.

The loss of tax deductions in the recent tax bill make conditions even more draconian.

Monthly rental costs are deterring tech's future minions. Without the droves of talent flooding the area, it becomes harder for the industry to incrementally expand.

It also boosts the costs of existing development/operations staffers whose capital feeds back into the local housing market buying whatever they can barely afford for astronomical prices.

Another price spike ensues with first-time home buyers piling into already bare-bones inventory because of the fear of missing out (FOMO).

After surveying HR tech heads, it's clear there aren't enough artificial intelligence (A.I.) programmers and coders to fill internal projects.

Compounding the housing crisis is the change of immigration policy that has frightened off many future Silicon Valley workers.

There is no surprise that millions of aspiring foreign students wish to take advantage of America's treasure of a higher education because there is nothing comparable at home.

The best and brightest foreign minds are trained in America, and a mass exodus would create an even fiercer deficit for global dev-ops talent.

These U.S.-trained foreign tech workers are the main drivers of foreign tech start-ups.

Dangling carrots and sticks for a chance to start an embryonic project in the cozy confines of home is hard to pass up.

Ironically enough, there are more A.I. computer scientists of Chinese origin in America than there are in all of China.

There is a huge movement by the Chinese private sector to bring everyone back home as China vies to become the industry leader in A.I.

Silicon Valley is on the verge of a brain drain of mythical proportions.

If America allows all these brilliant minds to fly home, not only to China but everywhere else, America is just training these workers to compete against American workers.

A premier example is Baidu co-founder Robin Li who received his master's degree in computer science from the State University of New York at Buffalo in 1994.

After graduation, his first job was at Dow Jones & Company, a subsidiary of News Corp., writing code for the online version of the Wall Street Journal.

During this stint, he developed an algorithm for ranking search results that he patented, flew back to China, created the Google search engine equivalent, and named it Baidu (BIDU).

Robin Li is now one of the richest people in China with a fortune of close to $20 billion.

To show it's not just a one-hit-wonder type scenario, three of the top five start-ups are currently headquartered in Beijing and not in California.

The most powerful industry in America's economy is just a transient training hub for foreign nationals before they go home to make the real moola.

More than 70% of tech employees in Silicon Valley and more than 50% in the San Francisco Bay Area are foreign, according to the 2016 census data.

Adding insult to injury, the exorbitant cost of housing is preventing burgeoning American talent from migrating from rural towns across America and moving to the Bay Area.

They make it as far West as Salt Lake City, Reno, or Las Vegas.

Instead of living a homeless life in Golden Gate Park, they decide to set up shop in a second-tier American city after horror stories of Bay Area housing starts populate their friends' Instagram feeds and are shared a million times over.

This trend was reinforced by domestic migration statistics.

Between 2007 and 2016, 5 million people moved to California, and 6 million people moved out of the state.

The biggest takeaways are that many of these new California migrants are from New York, possess graduate degrees, and command an annual salary of more than $110,000.

Conversely, Nevada, Arizona, and Texas have major inflows of migrants that mostly earn less than $50,000 per year and are less educated.

That will change in the near future.

Ultimately, if VCs think it is expensive now to operate a start-up in Silicon Valley, it will be costlier in the future.

Pouring gasoline on the flames, Northern California schools are starting to fold like a house of cards due to minimal household formation wiping out student numbers.

The dire shortage of affordable housing is the region's No. 1 problem.

A 1,066-sq.-ft. property in San Jose's Willow Glen neighborhood went on sale for $800,000.

This would be considered an absolute steal at this price, but the catch is the house was badly burned two years ago. This is the price for a teardown.

When you combine the housing crisis with the price readjustment for big data, it looks as if Silicon Valley has peaked or at the very least it's not cheap.

Yes, the FANGs will continue their gravy train, but the next big thing to hit tech will not originate from California.

VCs will overwhelmingly invest in data over rental bills. The percolation of tech ingenuity will likely pop up in either Nevada, Arizona, Texas, Utah, or yes, even Michigan.

Even though these states attract poorer migrants, the lower cost of housing is beginning to attract tech professionals who can afford more than a burned down shack.

Washington state has become a hotbed for bitcoin activity. Small rural counties set in the Columbia Basin such as Chelan, Douglas, and Grant used to be farmland.

The bitcoin industry moved three hours east of Seattle for one reason and one reason only - cost.

Electricity is five times cheaper there because of fluid access to plentiful hydro-electric power.

Many business decisions come down to cost, and a fractional advantage of pennies.

Globalization has supercharged competition, and technology is the lubricant fueling competition to new heights.

Once millennials desire to form families, the only choices are regions where housing costs are affordable and areas that aren't bereft of tech talent.

Cities such as Las Vegas and Reno in Nevada; Austin, Texas; Phoenix, Arizona; and Salt Lake City, Utah, will turn into hotbeds of West Coast growth engines just as Hangzhou, China-based Alibaba (BABA) turned that city into more than a sleepy backwater town with a big lake at its center.

The overarching theme of decentralizing is taking the world by storm. The built-up power levers in Northern California are overheated, and the decentralization process will take many years to flow into the direction of these smaller but growing cities.

Salt Lake City, known as Silicon Slopes, has been a tech magnet of late with big players such as Adobe (ADBE), Twitter (TWTR), and EA Sports (EA) opening new branches there while Reno has become a massive hotspot for data server farms. Nearby Sparks hosts Tesla's Gigafactory 1 along with massive data centers for Apple, Alphabet, and Switch.

The half a billion-dollars required to build a proper tech company will stretch further in Austin or Las Vegas, and most of the funds will be reserved for tech talent - not slum landlords.

The nail in the coffin will be the millions saved in state taxes.

The rise of the second-tier cities is the key to staying ahead of the race for tech supremacy.