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August 22 Biweekly Strategy Webinar Q&A

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 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.

_________________________________________________________________________________________________

Quote of the Day

"Twitter is about moving words. Square is about moving money," - said CEO of Twitter, Jack Dorsey, to The New Yorker, October 2013.

June 25, 2018

Diary, Newsletter

Global Market Comments
June 25, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR IS THIS A 1999 REPLAY?),
(AAPL), (FB), (NFLX), (AMZN), (GE), (WBT),
(JOIN ME ON THE QUEEN MARY 2 FOR MY JULY 11, 2018 SEMINAR AT SEA),
(JUNE 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SQ), (PANW), (FEYE), (FB), (LRCX), (BABA), (MOMO), (IQ), (BIDU), (AMD), (MSFT), (EDIT), (NTLA), Bitcoin, (FXE), (SPY), (SPX)

June 20 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers' Q&A for the Mad Hedge Fund Trader June 20 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: What are your thoughts on Square (SQ) as a credit spread or buyout proposition?

A: I love Square long term, and I think there's another double in it. They were a takeover target, but now the stock's getting so expensive it may not be worth it. So, Square is a buy. However, look for a summer sell-off to get into a new position.

Q: The FANGs feel a little bubbly here; will they pull back on a market dip?

A: Yes, my entire portfolio of FANG options is designed to expire on the July 20th expiration. In fact, I may even come out before then as we reach the maximum profit point on these option call spreads. Then look for a summer meltdown to get back in. The FANGs could double from here. If I am wrong they will just continue to go straight up.

Q: Palo Alto Networks (PANW) has a new CEO; are you concerned?

A: Absolutely not, I love Palo Alto networks, as well as the (FEYE) FireEye. It's just a question of getting in at the right price. It's one of the many ballistic stocks in Tech this year that we've been recommending for a long time. Hacking an online theft is never going to go out of style.

Q: Is it time to sell Facebook (FB)?

A: Yes, if you're a trader. No, if you're a long-term investor. There's another double in it. You're going to have natural profit taking on all of these Techs for the short-term, and possibly for the summer, because they've just had enormous runs. If you aren't in the FANGs this year, you basically don't have any performance because almost all of the rest of the market has gone down.

Q: What are your thoughts on Lam Research (LRCX)?

A: The whole chip sector has had two big sell-offs this year because of their China exposure and the trade wars. Expect more to come. China gets 80% of their chips from the U.S. This is normal at the end of a 10-year bull market. It's also normal when a sector transitions from highly cyclical to secular, which is what's happening in the chip sector. Twice the volatility gets you twice the returns.

Q: Would you stay away from Chinese stocks like Alibaba (BABA), Momo Inc.(MOMO), IQ (IQ), and Baidu (BIDU)?

A: I have stayed away because of the trade war fears, and it was the completely wrong thing to do, because they've gone up as much as our Tech stocks, except for the last week. So yes, I would be buying dips on these big Chinese Tech stocks, because they are drinking the same Kool Aid as our Techs, and it's working.

Q: I hear that short selling of volatility is coming back; is that a good thing?

A: Actually, it is a good thing, because it creates buyers on these dips when you had no short sellers left. The entire industry got wiped out in February creating $8 billion in losses. There was no one left to cover those shorts and support the market. Of course, the result was we got a lower low down here because of that. It's always better to have a two-way market to get a real price. Now professionals are sneaking back in on the short side, which is as it should be. This should never have been a retail product.

Q: Why are international markets so disconnected from the U.S.? Many Asian markets are down heavily while the U.S. are up.

A: The U.S. stock market benefits from a rising dollar and rising interest rates, whereas international markets suffer. When you have weak currencies in the emerging markets, people sell their stocks to avoid the currency hit, and that takes the emerging markets down massively. A lot of emerging market companies have their debts denominated in U.S. dollars, so they get killed by a strong greenback. Also, the emerging markets make a lot of money selling goods into China, so when the Chinese economy gets attacked by the U.S. and growth slows, it has the byproduct of attacking all our other allies in Southeast Asia.

Q: Is it a good idea to sell everything for the summer and just de-risk for my portfolio?

A: That's what I'm doing. Summer trading is usually horrible, and now we're going into the summer at close to a high for the year, with a terrible political backdrop and possible economic growth peaking right here. So, yes, it's a good time to sit back, count your money, and maybe even spend some of it on a European vacation.

Q: When do you think the yield curve will invert?

A: In a year, and that is typically when you get a peaking of economic growth and the stock market.

Q: Is the Fed's faster-than-expected desire to raise rates good for equities, or will investors likely sell this news as quantitative tightening continues?

A: Short-term they will buy the market on rising rates, they always do at the early part of an interest rate rising cycle. They sell stocks when you get to the middle or the end of a rate rising cycle.

Q: Do you think large Tech stocks are expensive here?

A: No, I think the Large-Cap Tech stocks can potentially double here. It can take another year to year and a half to do it, and if they don't do it in this cycle they will certainly do it in the next one, after the next recession in the 2020s. So, long term you want to think FANG, FANG, FANG, TECH, TECH, TECH. You really shouldn't have anything else in the long term, except for maybe Biotech, where you can now get in at a multiyear low.

Q: Can I buy a chip company like Advanced Micro Devices (AMD), or should I buy a cloud company, like Microsoft (MSFT)?

A: I would go with the Cloud company. The innovation there is incredible. Cloud is growing like the Internet itself was growing on its own in 1995, and with chip stocks like (AMD), you're going to get much higher volatility, but more gain. So, pick your poison. But I would go with the Cloud plays.

Q: Can we watch the recorded version of this webinar later?

A: Yes, we post the webinar on our website a couple hours later, if you're a paid subscriber.

Q: What about the CRISPR stocks?

A: They are a screaming buy right now, buy Editas Medicine (EDIT) and Intellia Therapeutics (NTLA) on the dip. The paper that triggered the sell-off saying that CRISPR causes cancer is complete BS.

Q: Only 30 million in Bitcoin was stolen in South Korea so will that still have an impact?

A: Yes, but there have been countless other hacks this year and the total loss is well over $500 million. In addition, Bitcoin is now down 70% from its December top so not all is well in cryptocurrency land.

Q: Should we expect any Trade Alerts before August 8?

A: Yes, some of my best trades have been done while only vacation. I once sold short the Euro (FXE) from the back of a camel in Morocco. Another time, I bought the S&P 500 (SPY) while hanging from a cliff face on the Matterhorn. Both of those made good money.

Q: Will the S&P 500 reach new highs before the end of the year?

A: Yes, once you get the election out of the way, that removes a huge amount of uncertainty from the market. If we could end our trade war before then, I think you're looking at another 10-15% in gains from this level by the end of the year. That takes you to an (SPX) of 3,100 by the end of 2018, which was my January 1 prediction.

Q: What does all the heavy mergers and acquisition activity mean for the market?

A: It means fewer stocks are left to trade. Stock shortages leads to higher prices, always, so it is a big market positive this year

Good Luck and Good Trading.

John Thomas
CEO and Publisher
The Diary of a Mad Hedge Fund Trader

June 20, 2018

Tech Letter

Mad Hedge Technology Letter
June 20, 2018
Fiat Lux

Featured Trade:
(GOOGLE'S GRAND CHINA PLAY),
(BABA), (JD), (GOOGL), (AAPL), (BIDU), (AMZN), (NFLX)

Google's Grand China Play

Tech Letter

There is light at the end of the tunnel.

A glimmer of hope is better than nothing.

Stolen IP was yesterday's story.

The administration's attempts to stick China with the bill is a waste of time.

The stock market is forward-looking and that is what I focus on when writing the Mad Hedge Technology Letter.

American tech companies want to turn over this bitter page of history and construct a fruitful future.

Ironically, it could be no other than American large tech companies that solves this trade misunderstanding by embracing Chinese tech instead of dragging them through the embers of political chaos.

That is what this groundbreaking partnership between Alphabet (GOOGL) and China's second largest e-commerce company JD.com (JD) is telling us.

If American and Chinese tech agree to fuse together through different M&A activity, strategic partnerships, and engineering projects, slapping penalties on your own interests would be without basis.

Albeit gone are the yesteryears of complete ownership on the other's turf, a medium ground could be found to satisfy both parties.

Alphabet's $550 million investment will give it 27 million shares of JD.com Class A shares equating to a 1% stake in JD.com.

JD.com products will now be hawked on Google Shopping, a platform giving users a chance to compare different price points from various sellers.

JD.com's fresh links with Silicon Valley's original powerhouse is timely because its business-to-consumer retail sales have slightly dipped in form from 27% last year to an underwhelming 25% in the first quarter of 2018.

Alibaba (BABA), the Amazon of China, is the 800-pound gorilla in the room and has a stranglehold on this market, carving out a robust 60% of sales from business to consumer retail.

Chinese companies have never worried about foreign companies seizing market share in China because they know the rigid operating environment mixed with "cultural" barriers will lead to a rapid demise.

Chinese firms are channeling their distress toward local competitors that understand the market as well as they do and number in the 100s in any one industry.

This is also a huge bet on the Chinese consumer who has put the world economy on its back creating the lions' share of global growth for the past 10 years.

Do not bet against China and the Chinese consumer.

Alphabet is taking this sentiment to the bank by integrating part of a premium Chinese tech firm into its own top line performance.

This investment would not happen if Alphabet believed the trade war could turn draconian cannibalizing each other's profit engines.

Alphabet has obviously been reading the tea leaves from the Mad Hedge Technology Letter as I identified China's huge competitive advantage in Southeast Asia and the huge potential for Chinese companies that migrate there.

The pivot toward Southeast Asia was the deal clincher for Alphabet and rightly so.

Alphabet has also invested in opening an A.I. (artificial intelligence) lab in Beijing showing its determination to extract a piece of the pie from China and ensuring their brand power is maintained in the Middle Kingdom.

Google search has been shut down on mainland China since 2010. Therefore, Alphabet needs to find alternative ways to benefit from the Chinese consumer and increase its presence.

The writing on the wall was when Baidu (BIDU) came to the fore with its own Chinese version of Google search.

Opportunities on the mainland have been scarce ever since the appearance of Baidu.

Apple (AAPL) has been the premier role model in China successfully juggling the complexities of the Chinese market. A big part of its staying power is offering local Chinese jobs.

Not just a few jobs, but millions.

As of April 2017, an Apple press release stated, "Apple has created and supported 4.8 million jobs in China" which is almost three times more than in America.

Apple deploys much of its supply chain around the mainland and taking down Apple in a trade war would strip millions of Chinese jobs in one fell swoop.

Not only that, Apple has deeply invested in data centers located in China and opened research centers in Shanghai and Suzhou.

Foxconn, a company responsible for assembling iPhones in mainland China, employs 1.2 million alone.

Alphabet would be smart to follow in the same footsteps, effectively, morphing into a hybrid Chinese company employing locals in droves and allowing millions of Chinese to earn their crust of bread through local factories.

Let me be clear: This would not hurt its business back at home.

It is also wrong to say that China is saturating because the 6.8% annual growth rate in China is a firm vote of confidence for Chinese discretionary spenders.

However, instead of competing head to head under the scrutiny of Chinese regulators, it is much more sensical to copy SoftBank's Masayoshi Son's lead when he invested $25 million in Jack Ma's Alibaba in 1999.

SoftBank's 1999 investment is now valued at more than $30 billion as of the current share price today.

Yahoo later joined the party in 2005, investing $1 billion into Alibaba and that stake is worth many times over.

Instead of fighting through cultural norms and fighting against the throes of an exotic business environment, paying for a stake and leaving its nose out of it has shown to be demonstrably effective.

Partnerships complicate the relationship, but if management can lock down each side's commitment to the very T, collaboration could spur even more innovation benefiting both countries and bottom lines.

China has draconian Internet controls put in place. American tech companies aren't up to snuff with cultural maneuverability to navigate through these shark-infested waters.

Better to pay for a stake and pick up the check after the market close.

Another winner in this deal is tech valuations, which has been the Cinderella story of 2018.

Although American tech companies will probably never be able to own 100% of a Chinese BAT. However, allowing these types of investments to go ahead is certainly bullish for equities.

Tech is still the sector lifting the heavy weight stateside and promoting innovation through collaboration will do a great deal to win the hearts and minds of Chinese people, companies and government.

As much as China hates the stain to its image of this nebulous trade war, it still deeply respects and admires large-cap American tech companies.

Chinese Millennials particularly have a deep love affair with Tesla's Elon Musk. They are captivated by his braggadocio, which they find appealingly exotic and captivatingly un-Chinese.

Through this partnership, JD.com will learn heaps about cutting-edge ad-tech and is guaranteed to apply the know-how to its home user base. In return, Alphabet will get deep insights of how JD.com controls the entire logistical experience and how a Chinese tech behemoth operates its supply chain.

The nuggets of information pocketed will help Alphabet compete more with Amazon back at home.

This is a win-win proposition.

Adding even more cream on top, enhanced brand awareness by joining together with Google could catapult JD.com into the shop window of America's consciousness.

Up until today, JD.com is hardly known about in the West except for specialists that avidly follow technology like the Mad Hedge Technology Letter.

I reiterate my stance of not buying into Chinese tech companies, and readers would be better served buying Microsoft (MSFT), Amazon (AMZN), and Netflix. (NFLX)

It makes no sense to trade stocks mired in the heart of a trade war.

As much as I love Alibaba as a company, it has been trading in a range because of the whipsawing headlines released in the press.

However, I can stand from afar and admire how the Chinese BATs have advanced in such a short amount of time.

If American tech and Chinese tech merge to the point of unrecognizability, consolidation could create a super tech power comprising of mixed Chinese and American interests.

Instead of bickering at each other, other solutions look to be more compelling.

The world's economy needs a healthy Chinese economy and vibrant Chinese consumer.

If the Chinese economy ever fell off a cliff, you can kiss this nine-year equity bull market goodbye, and the Mad Hedge Technology Letter would turn extremely bearish in a blink of an eye.

Therefore, America has a large stake in not alienating the Mandarins to the point of disgust.

I am still bullish on equities, but vigilance is the name of the game for short-term traders.

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Quote of the Day

"My belief is that one plus one equals three. The pie gets larger, working together," Apple CEO Tim Cook said about its operations in mainland China and working with the Chinese Communist government.

June 18, 2018

Tech Letter

Mad Hedge Technology Letter
June 18, 2018
Fiat Lux

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