Posts

August 5, 2019

Mad Hedge Technology Letter
August 5, 2019
Fiat Lux

Featured Trade:

(THE CHINA TARIFF BOMBSHELL AND TECHNOLOGY),
(AAPL), (NVDA), (INTC), (MU), (WDC), (BBY)

The China Tariff Bombshell and Technology

With one little tweet, the state of technology and the companies that rely on the public markets that serve them went haywire.

U.S. President Donald Trump levied another 10% on the $300 billion that had not been tariffed up yet compounding the misery for anyone who has any vested interest in trade with mainland China.

The tariffs will take effect on September 1st.

How does this shake out for American technology?

Any brand tech name that has substantial supply chain operations can kiss their stay in the Middle Kingdom goodbye.

If management didn’t understand that before, then it’s clear as night that they need to shift their supply chain out of the reaches of the Chinese communist party.

The U.S. Administration tripling down on China being our archnemesis means that any sort of cross-border economic trade or cultural exchange will be viewed through the prism of warped geopolitics.

The U.S. President Donald Trump has in fact taken a page out of the Chinese playbook turning everything he sees and touches into a transactional tool for what he is pursuing at the time or in the future.

Specific companies facing the wrath of the tariffs are companies as conspicuous as Apple filtering down to the SMEs that make local business local.

Semiconductor chips are a huge loser in this new development as the price of electronic goods will rise with the tariffs.

If you want a name that lies in the heart of electronic consumer goods, then BestBuy (BBY) would encapsulate this thesis and unsurprisingly they were taken out to the back of the woodshed and taught a lesson dropping 10% on the news.

Any technology outfit that imports goods from China will be hit as well and this means semiconductor chips along the lines of Nvidia (NVDA), Intel (INTC), Western Digital (WDC) and Micron (MU) among others.

Chips are the meat and bones that go into end products like iPads and a slew of smart devices.

Demand will be hit because of the cost of producing these types of consumer products will rise.

The softness is showing up in the numbers with Apple’s iPhone revenue down 12% year-over-year.

Samsung of Korea also showed that this isn’t just an American problem with their semiconductor division’s operating profits down 71% year-over-year.

The Korean conglomerate is in a spat with the Japanese government over war crimes from the second world war causing the Japanese government to bottleneck the supply of chemicals needed to produce high-level semiconductor chips.

The export restriction will drag down SK Hynix display business who is one of the largest producers of DRAM chips and also a Korean company.

Consumers are also using their phones longer with Apple iPhone customers holding their device up to 4 years delaying the refresh cycle.

The company that Steve Jobs built will have to repurpose themselves for a brave new tech landscape that includes heavier regulation, trade tariffs, and device saturation.

When investors talk about the “low hanging fruit,” at this point, Apple isn’t one of them.

And if you think the services business is a cakewalk, ponder about how many apps and behemoths that spit out a whole lineup of apps.

Apple still has its ecosystem and should guard it with its life, this is the same ecosystem that can charge Google around $10 billion per year to slap on Google search as the primary search engine on Apple devices.

Expect tech to telegraph a deceleration in revenue for the last quarter and next year.

The tech environment is brittle at this point and uncertainty wafts in the air like a hot stack of pancakes.

 

 

The Death of Retail

I stopped at a Wal-Mart (WMT) the other day on my way to Napa Valley.

I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long stem roses would prove useful. I happened to know you could get these for $10 at Wal-Mart.

After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.

The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there.

So I was not surprised when the company announced that it was closing 267 stores worldwide. The closures amount to only 1% of Wal-Mart?s total floor space. Some 10,000 American jobs will be lost.

The Wal-Mart downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.

However, it now appears we have reached a tipping point, and a point of no return. The future is happening faster than anyone thought possible. Call it the Death of Retail.

I remember the first purchases I made at Amazon 20 years ago. The idea was so dubious that I made my initial purchases with a credit card with a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.

This is despite the fact that I knew Jeff Bezos personally as a former Morgan Stanley colleague. And how stupid was that name, Amazon? At least he didn?t call it ?Yahoo?.

Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don?t have to fight traffic, engage in the parking space wars, or wait in line to pay.

It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!

A used 42-inch Sub Zero refrigerator with a front door icemaker and water dispenser? Have it there in two days, with free shipping.

In 2000, after the great ?Y2K? disaster that failed to show, I met with Bill Gates Sr. to discuss the foundation?s investments. It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds. It turned out to be a brilliant move, coming mere months before the Dotcom bust.

Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn?t invested a dollar in commercial real estate.

It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers and rendering commuting unnecessary. Shopping malls would become low rent climbing walls and paint ball game centers.

Mr. Gates? prediction may finally be occurring. Some counties in the San Francisco Bay area now see 25% of their workers telecommuting.

It is becoming common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.

The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company, with no office. Everyone works at home across the country and around the world.

You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch).

The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we?re hiring, especially in marketing.

You can see this in the business prospects of traditional brick and mortar retailers last year, which were dire.

As a result, Macy?s (M) stock plunged by a shocking -53%, Nordstrom (JWN) by -43%, and Best Buy (BBY) by -39%. Value players have mistaken the present low prices and subterranean price earnings multiples for a ?Black Friday? sale.

It has been like leading lambs to the slaughter.

Yes, some of this was caused by record warm temperatures on the US East coast, which led many to cancel their purchases of a new winter coat. But it is also happening because the entire ?bricks and mortar? industry is getting left behind by the march of history.

Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of amazon, with higher prices. It is all ?Hour late and dollar short? stuff.

In the meantime, Amazon soared by 150%, and was one of the top performing stocks of 2015. It is thought that Amazon accounted for a staggering 25% of all the new growth in US retail sales last year.

And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!

There?s a good reason why you haven?t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.

I did this when I realized that management never knew beforehand which of their products would succeed, and which would bomb, and therefore were constantly clueless about future earnings.

The business for them was an endless roll of the dice. That is a proposition which I was unwilling to invest in. There were always better trades.

I confess that I had to look up the ticker symbols for this story, as I never use them.

However, I also missed the miracle at Amazon. I could never grasp their long tail strategy and their 100 X multiples. I have had to admire it from the sidelines. At least I wasn?t short.

You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers.

It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when ?cheap? was on its way to zero.

So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.

Or better yet, go shopping at Amazon. The deals are to die for.

To read ?An Evening with Bill Gates Sr.?, please click here.

WMT 1-15-16

AMZN 1-15-16

m, 1-15-16

JWN 1-15-16

Wal-MartThe Death of Retail?