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The Market Outlook for the Week Ahead, or Stagflation is On!

There is no doubt that the data released out on Friday were a complete disaster for stock investors. The Dow Average futures posted a 1,000-point swing, from up 200 in the overnight markets to down 800 intraday.

Specifically, the Consumer Price Index came in at a hot 0.4%, which is 4.8% annualized. Five-year Inflation Expectations, which the Fed follows most closely, rocketed to 6.0%. Worse yet, Consumer Confidence rose only 0.1% for the second month in a row, the worst performance in 12 years. Friday was the day that the hard data met the soft data and concluded that the recession was on.

That screeching noise you hear is the economy grinding to a halt.

Stock markets absolutely hate stagflation. The last time we had stagflation was during the Ford and Carter administrations during the 1970s, when it took eight years for the Dow to rise a measly 1,000 points. Back then, Wall Street shrank to a fraction of its former self.

This all richly justifies my downside target of 5,000 for the S&P 500, off 20% from the February top, which is increasingly becoming a mainstream prediction. If I am wrong, it will plunge to 4,500, or down 30%.

We were promised animal spirits that would set markets on fire. Instead, the animals are sent back into hibernation and the markets are being snuffed out. I watch every single data release that comes out on a daily basis, and it is amazing how fast they are almost all rolling over at once.

The combination of rising inflation and a weakening economy is described by one infamous word: Stagflation. What’s worse, we are only one month into a stagflationary trend that could run for many months or years.

As a result, we have seen the worst start to a year since Q1 2020, the last time Trump was president. March was the worst month in 3 ½ years. It seems the stock market heartily agrees with my view.

It gets worse.

All earnings estimates for this year are based on record corporate profit margins. If those margins fail to hold when earnings are announced in the coming weeks, it may trigger the second 10% leg down in the major averages. More concerning is the forward guidance companies may provide.

It turns out that companies watch the daily data releases too. Companies sitting on their hands, not investing or hiring, can itself alone cause recessions. Right now, nobody knows what the heck to do.

The final shoe to fall will be a sharp spike up in the headline Unemployment Rate. We get the next read on this on Friday, April 4. It’s just a question of how soon this shows up in the data. Right now, hundreds of thousands of workers have been fired but are still receiving paychecks while their status is being challenged in the courts. So they aren’t being counted as unemployed….yet.

Some 42% of all the hiring in the US over the past three years has been in just two sectors, healthcare and education. That is where the biggest cuts are being made now. It’s all about getting ahead of the curve.

Let me tell you how bad things can get.

On Wednesday, the president announced 25% import duties for completed cars. General Motors (GM) makes about 30% of its cars in Mexico and Canada. As a result, (GM) may have to raise some car prices by 10%-25%. But the president has ordered (GM) not to raise prices at all.

It costs $20 billion and takes four years to build a new car factory in the US from scratch. This all turns (GM) into the perfect money-destruction machine. (GM) may not survive. And you wonder why I have been short (GM) stock two months in a row. Trump must really hate Detroit.

Believe it or not, there is a silver lining to all this.

If you missed the great bull market of the last five years, when the major indexes more than doubled, you are eventually going to get a second bite at the apple. Share prices are dropping so fast that we may get to a final capitulation selloff rather quickly. Then we will be spoiled for choice with stocks that have easy doubles and triples in them.

Let me tell you a trader’s trick.

Watch the shares of companies that have the sharpest rises on the rare up days. These are the ones that institutions are willing to jump into and hold on to forever, the permanent earnings compounders. If you take a look at the longs in the Mad Hedge Model Trading Portfolio, they all meet these criteria. They include (COST), (BRK/B), (GS), (MS), (NVDA), and (AMZN).

Buying bonds (TLT) and gold (GLD) going into a recession may not be a bad idea either. And for those who don’t want to play when the going gets rough, there are always 90-day US Treasury bills yielding 4.20%. They are government-guaranteed.

March is now up +3.17% so far. That takes us to a year-to-date profit of +12.64% so far in 2025. That means Mad Hedge has been operating as a perfect -1X short S&P 500 ETF since the February top. My trailing one-year return stands at a spectacular +81.35%. That takes my average annualized return to +49.82% and my performance since inception to +764.63%.

It has been another busy week for trading. I took profits on the short in (NVDA), which collapsed in the latest tech-driven leg down. I added a new long in (COST), a position I have been trying to get into for years, and it immediately started to make money.

I also stopped out of my two auto shorts in (GM) and (TSLA) at cost. Then Trump moved up his auto tariff announcements by a week, and both positions shot up to max profits. Welcome to trading in the Trump administration. In this period of extreme uncertainty, I have tightened up my stop-loss strategy to avoid big losses.

Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 74 of 94 trades have been profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

Stagflation Accelerates, with a hot 0.4% increase in the Consumer Price Index and a tepid 0.1% increase in Consumer Spending, the worst since the Pandemic. One-year inflation expectations have shot up to 5.0%. Today is the day the hard data met the soft data and jointly agreed that we are in a recession. S&P 500 5,000 here we come!

25% Auto Import Tariffs Become Official on April 2. The auto industry, once the largest in the US, says it will trigger a recession. Car prices will rise an average of $5,000 per vehicle. Expect the economies of Michigan, Indiana, Wisconsin, and Illinois to get demolished as they feed a lot of the parts into Detroit. Steel will also be affected. Some 30% of autos made by US companies are assembled in Canada and Mexico. Which US car makers have the highest share of American content? Tesla.

US GDP Grows 2.4%, during the October-December quarter. These may be the last positive numbers we see for a while as the country heads into recession.

Bonds Rocket, with inflation now running at a 5% annual rate, and the tariffs should add another 1%. That means the next Fed move is likely to be an interest rate RISE, while the unemployment rate is rising. That’s a worst-case scenario for the economy and the stock market.

Moody’s Warns of a Downgrade of the United States, saying Trump’s trade tariffs could hamper the country’s ability to cope with a growing debt pile and higher interest rates. Recession risks are rising.

Canada Freezes Rebates for Tesla Purchasers. Canada has frozen C$43 million ($30.11 million) of rebate payments for Tesla. Buyers had been eligible for a $5,000 rebate on vehicles costing less than $65,000. Tesla’s Q1 sales out next week is expected to be terrible. Avoid (TSLA).

S&P Case Shiller National Home Price Index Rises 4.7% YOY. Home price growth held steady at 0.5% M/M, on a seasonally adjusted basis, in January, according to the S&P CoreLogic Case-Shiller Home Price Index composite for 20 cities. On an unadjusted basis, the Case-Shiller HPI for 20 cities inched up 0.1% from a month earlier, decelerating from the +0.2% consensus and accelerating from the previous month's -0.1%. On a Y/Y basis, the gauge climbed 4.7%, vs. +4.6% expected and +4.5% prior.

Consumer Confidence Plunges, by the most in five years, according to the conference. The Conference Board’s gauge of confidence decreased 7.2 points to 92.9, data released Tuesday showed. The median estimate in a Bloomberg survey of economists called for a reading of 94. The soft data for the economy continues to look horrific.

FedEx Gets Crushed, another early recession indicator. Fewer things are shipped in shrinking economies. Fears about a U.S. recession and President Donald Trump’s new reciprocal tariff rates starting April 2 could threaten FedEx’s earnings, Paterson said in a Friday note to clients. Memphis-based FedEx is generally regarded as a barometer of the global economy, as its business touches a wide variety of global industries.

Next-Gen Chips are Power Hogs. Big tech companies, which are all betting heavily on AI, will undoubtedly buy those chips, even if the price skyrockets. But there’s growing evidence that there won’t be enough electricity to power all of their AI dreams. Some new AI apps use 150 times more power than the old ones.

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.

On Monday, March 31, at 8:30 AM EST, the Chicago PMI is announced.

On Tuesday, April 1, at 8:30 AM, the JOLTS Job Openings Report is released.

On Wednesday, April 2, at 1:00 PM, the ADP Employment Change is published.

On Thursday, April 3, at 8:30 AM, the Weekly Jobless Claims are disclosed. We also get the final report for Q1 GDP.

On Friday, April 4, at 8:30 AM, the Nonfarm Payroll Report for March is printed. At 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, back in 2002, I flew to Iceland to do some research on the country’s national DNA sequencing program called Decode, which analyzed the genetic material of everyone in that tiny nation of 250,000. It was the boldest project yet in the field and had already led to several breakthrough discoveries.

Let me start by telling you the downside of visiting Iceland. In the country that has produced three Miss Universes over the last 50 years, suddenly you are the ugliest guy in the country. Because guess what? The men are beautiful as well, the descendants of Vikings who became stranded there after they cut down all the forests on the island for firewood, leaving nothing with which to build long boats.

I said they were beautiful, not smart.

Still, just looking is free and highly rewarding.

While I was there, I thought it would be fun to trek across Iceland from North to South in the spirit of Shackleton, Scott, and Amundsen. I went alone because, after all, how many people do you know who want to trek across Iceland? Besides, it was only 150 miles, or ten days to cross. A piece of cake really.

Near the trailhead, the scenery could have been a scene from Lord of the Rings, with undulating green hills, craggy rock formations, and miniature Icelandic ponies galloping in herds. It was nature in its most raw and pristine form. It was all breathtaking.

Most of the central part of Iceland is covered by a gigantic glacier over which a rough trail is marked by stakes planted in the snow every hundred meters. The problem arises when fog or blizzards set in, obscuring the next stake and making it too easy to get lost. Then you risk walking into a fumarole, a vent from the volcano under the ice, always covered by boiling water. About ten people a year die this way.

My strategy for avoiding this cruel fate was very simple. Walk 50 meters. If I could see the next stake, I would proceed. If I couldn’t, I pitched my tent and waited until the storm passed.

It worked.

Every 10 kilometers stood a stone rescue hut with a propane stove for adventurers caught out in storms. I thought they were for wimps but always camped nearby for the company.

One of the challenges in trekking near the North Pole is getting to sleep. That’s because the sun never sets and it's daylight all night long. The problem was easily solved with the blindfold that came with my Icelandic Air first-class seat.

I was 100 miles into my trek, approached my hut for the night, and opened the door to say hello to my new friends.

What I saw horrified me.

Inside was an entire German Girl Scout Troop spread out in their sleeping bags all with a particularly virulent case of the flu. In the middle was a girl lying on the floor, soaking wet and shivering, who had fallen into a glacier-fed river. She was clearly dying of hypothermia.

I was pissed and instantly went into Marine Corps Captain mode, barking out orders left and right. Fortunately, my German was still pretty good then, so I instructed every girl to get out of their sleeping bags and pile them on top of the freezing scout. I then told them to strip the girl of her wet clothes and reclothe her with dry replacements. They could have their bags back when she got warm. The great thing about Germans is that they are really good at following orders.

Next, I turned the stove burners up high to generate some heat. Then I rifled through backpacks and cooked up what food I could find, force-fed it into the scouts, and emptied my bottle of aspirin. For the adult leader, a woman in her thirties who was practically unconscious, I parted with my emergency supply of Jack Daniels.

By the next morning, the frozen girl was warm, the rest were recovering, and the leader was conscious. They thanked me profusely. I told them I was an American “Adler Scout” (Eagle Scout) and was just doing my job.

One of the girls cautiously moved forward and presented me with a small doll dressed in a traditional German Dirndl, which she said was her good luck charm. Since I was her good luck, I should have it. It was the girl who was freezing to death the day before.

Some 20 years later, I look back fondly on that trip and would love to do it again.

Anyone want to go to Iceland?

Iceland 2002

Good Luck and Good Trading,

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

March 21, 2025

Diary, Newsletter, Summary

Global Market Comments
March 21, 2025
Fiat Lux

Featured Trade:

(THE MAD HEDGE MARCH TRADERS & INVESTORS SUMMIT REPLAYS ARE UP)
(MARCH 19 BIWEEKLY STRATEGY WEBINAR Q&A),
(SH), (SDS), (COST), (PANW), (FTNT), (ZS), (MSFT), (GOOGL), (NVDA), (GLD), (AMZN), (BAIDU), (BABA), (LNG), (FXA), (FXE), (FXC), (FXB)

March 19 Biweekly Strategy Webinar Q&A

Diary, Homepage Posts, Newsletter

Below please find subscribers’ Q&A for the March 19 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.

Q: I tried to get into ProShares Short S&P500 (SH), it seems pretty illiquid. How did you get in?

A: Well, before I actually sent out the trade alert, I tested the liquidity of the SH seeing if you could get anything done. This is an easy thing to buy on up days in the market when others are taking profits. It is a really difficult thing to get into on down days in the market because you have so many long-only mutual funds trying to hedge their exposure through buying the (SH). We literally had just one up day at the beginning of the month, and I was able to increase my position tenfold and had no trouble getting my price on the LEAPS at $0.50. If you waited one day, you would have had to pay $0.60 for the same position, and that’s because the volatility explodes on this thing. If you look at the charts, the 1x short play has actually delivered enormous returns, as well as the 2x. It’s outperforming 2 to 1. So you have to buy when other people are selling, that’s the only way to get in and out of the (SH). Of course, I’m buying these things with the intention of running these to expiration.

Q: Is it time to sell US stocks?

A: Yes but only on the up days like today. Don’t sell into a pit, don’t sell into bottoms—wait for rally days like today. That's a good place to reduce risk and add some short positions like the ProShares Short S&P500 (SH) and the ProShares UltraShort S&P500 (SDS).

Q: How did you miss the rotation to Europe and China in emerging markets?

A: Very simple—if you ignore something for 15 years, it’s easy to miss a turn. I also missed the turn in Japan, which I ignored for 35 years. The real reason though is that I underestimated the extremity of this government, its economic policies, and the chaos it would create. I think almost everyone underestimated what the new government would actually do and how it would affect the stock market. If I knew ahead of time that the government would adopt recessionary policies, I would have done everything to get my money out of the US and into Europe and China, but this kind of unfolded with a shock a day, sometimes a shock an hour, and markets don’t like shocks and surprises, so they sold off. The more a stock had gone up in the last six months, the more it went down when the new government came into office.

Q: What are your downside targets for the market?

A: Now that we are in recession, I think any 5% rally off the recent low at 5500, you want to sell. The market could rally 3-5% off the bottom—that would be half of the recent loss. Then you’d want to get rid of more longs, cut your portfolio down to a few very high-quality positions, and add downside protection by buying the ProShares Short S&P500 (SH), the ProShares UltraShort S&P500 (SDS), doing buy rights on the calls and buying outright puts. That would be my recommendation. Eventually I see the S&P 500 falling to 5,000 by the summer, and if I’m wrong, it’s going down 30% to 4,500. That is a deep recession scenario, which we are on the track for unless the government suddenly reverses its draconian policies. This is the most extreme government in American history.

Q: Are you going to use the selloff to get into Costco (COST) after a 20% selloff?

A: Absolutely. I’ve been trying to get into Costco for years and it’s just always been too expensive. They keep increasing earnings every year —investors are willing to pay very high multiples for that. This time around, I am going to get into Costco because they are an absolutely outstanding company. By the way, my mentor at Morgan Stanley was a guy named Barton Biggs, who created the asset management division some 40 years ago. He was close friends with Sam Walton, the founder of Walmart, and Sam Walton was a huge admirer of Costco, which was just starting up then. I’m surprised they never took over the company, which is too big to take over now.

Q: What to buy at the bottom?

A: You want to buy what was leading right before we went into this collapse. Those are financials, and the highest quality profit making of the Mag7 which include Nvidia (NVDA), Amazon (AMZN), Alphabet (GOOGL), Meta (META), as well as cybersecurity stocks like Palo Alto Networks (PANW), Fortinet (FTNT), Zscaler (ZS) and so on.

Q: Why are you making your recession call when we have no evidence of that fact?

A: If you wait for proof of recession, that often is the market bottom. And that could be August of this year. You know, I talk to hundreds of businessmen around the world, and everyone is saying business is slowing. Companies stop making decisions. Customers stop buying. Everyone's afraid of the tariffs. Nobody knows what's going to happen next. Business confidence is terrible. That adds up to a recession, but data tends to move very slowly, so we won't see it in the data for months. If you're a stock trader, you don't have the luxury of waiting for confirmation of the data. By the time you get it, the move is over. But if you cut half of government spending or 12% of GDP, the recession outcome is guaranteed. It's not a speculation. That is the government's goal: to cause a recession, so they can have a recovery going into the next election to take credit for.

Q: If Alphabet (GOOGL) is broken up, what will happen to the company?

A: With all of these big tech breakups, the parts will be worth a lot more than the whole. The individual pieces can be sold off at much bigger premiums creating new companies with more stock liquidity. This is what happened with AT&T (T) in 1982. I participated in that, and the parts were worth more than the original AT&T was within two years. I expect that to happen to Alphabet, and I expect that to happen if Amazon (AMZN) is broken up— eventually, these companies become so big, they become too big to manage. And if the management sees they can get 100% premium on a spinoff, they'll take it so fast it makes your head spin.

Q: None of the 90% gain in stock prices during the Biden administration was a result of his policies.

A: That's absolutely correct. He stayed out of the way, which is the best thing that governments can do—get the hell out of the way. American capitalism on its own will innovate and create profits far faster than any other economic system in history. Biden did quite a good job of staying away.

Q: Why are credit spreads still okay to do in this environment?

A: Because the implied volatility on the options are so high, you can get insane amounts of money—in the money like 30% or 40% —and get trades done and have a 0% chance of taking a loss on that. Suddenly you're being paid double to take risks on these option trades. The classic example is the $88-$90 call spread in Nvidia (NVDA), which we have expiring on Friday, March 21. We never even got close to $90, but the implied volatility on the day we added that trade was a ridiculous 75%. So, it's almost impossible to lose money when you put on trades with implied volatility in the options of 75%.

Q: What's your long-term target on gold now that your last long-term target of 3,000 finally got hit?

A: Yes, we've been recommending gold (GLD) for seven years now. In that time, it's doubled: $1,500 to $3,000. I'm now looking for $5,000 in gold by 2030, in five years. I got a feeling that flight-to-safety plays are going to be very popular in the world going forward. And by the way, people who did look for Bitcoin to protect them in any downturns: Bitcoin actually went down three times faster than the S&P 500 in the last month.

Q: Will stocks rise if the Fed cuts interest rates?

A: No, they won't, because the only reason the Fed will cut interest rates is if inflation falls, and right now, inflation is about to see a big upturn as those import duties of 25% or 50% work their way through the system. A lot of companies are front-running price increases before they even pay the tariffs and try to carve out some extra margin for themselves in advance. On Wednesday, Jay Powell said he expects inflation to rise from 2.5% to 2.8% by yearend and this will prove to be a low number. That is his “president breathing down the back of his next” forecast.

Q: What are your favorite Chinese stocks?

A: Well, a lot of these leading stocks have already gone up 50% or more since the beginning of the year as capital flees the United States and goes abroad. But if you held a gun to my head and said you had to buy two, I would buy Baidu (BIDU), and I would buy Alibaba (BABA). Those would be my Chinese picks. Alibaba is the closest thing you get to an Amazon in China.

Q: Has the dollar hit its lows this year?

A: No. Risk of the next Fed rate move is an interest rate cut. That is going to hang over the dollar and the currency markets for the entire year. And I don't see any recovery in the dollar this year. In fact, it's easy to see much lower lows, and higher highs in the foreign currencies. Buy (FXA), (FXE), (FXC), and (FXB) on dips.

Q: How do you feel about natural gas?

A: I would not be a buyer here. I think we've had a terrific run off of extreme cold weather—believe me, we got some of that in Nevada too—and that is starting to fade now. This is historically when that gas starts to fade for the year. Long term, my view on gas is bullish because of increased exports to China. We have a very pro-energy administration here; that means taking off the export restraints on natural gas, which can only be good for the gas companies and the gas price. China has basically told us they'll take all the natural gas they can get from us because every shipload of gas they buy (LNG) means less coal they have to burn.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.

Good Luck and Good Trading

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

January 23, 2023

Tech Letter

Mad Hedge Technology Letter
January 23, 2023
Fiat Lux

Featured Trade:

(PLANT-BASED MEAT IS A NO GO)
(BYND), (COST)

Plant-Based Meat Is A No Go

Tech Letter

I am not going to say that plant-based meat is a fraud, but it’s about as close to being a fraud one can be without it being one.

That’s a harsh analysis of an industry that once shone brightly just a few years ago and branded itself as a food technology company.

I can say there is not much technology happening in this product either.

The idea of plant-based meat replacing animal-based meat would need to overcome Americans’ thirst for the old-fashioned red meat that attaches itself to such iconic cultural events like the Super Bowl and the barbecue in the backyard.

That’s something I wouldn’t bet on at least in the next 50 years.

The leader in the industry Beyond Meat (BYND) has been executing pretty poorly and performing poorly as well.

This fake meat thing doesn’t seem like it will stick well with the median American consumer.

Remember that the CEO of Beyond Meat Ethan Brown swept us up with all these buzzwords explaining how fake meat was about to change the world.

Looking at some of his old speeches, it feels eerily similar to former Theranos CEO Elizabeth Holmes who was convicted of fraud in a California courtroom recently.

Brown's reason why Americans needed to start eating fake meat was that his mission demanded the urgency and scale the US mustered for World War II and that his products would simultaneously help solve heart disease, diabetes, cancer, climate change, natural resource depletion, and animal welfare.

Although not an outright lie, his words stretch the truth to the point of sounding idiotic. He might as well blame gas stoves for Americans not eating plant-based meat too like the recent political fad.

Then there is the obvious question of instead of eating “plant-based meat,” why don’t consumers just eat plants or just eat meat?

Case solved.

Why complicate such simple concepts?

Then there is the clout of big meat industry.

During government lockdown, meat companies did extraordinarily well and they still are banging out the top-line revenue like it’ll never go out of fashion.

The lockdowns meant there was a shortage of meat and Americans stored huge supplies of the product even buying a second fridge to accommodate the grandiose supply of reserve meats.

Now, Bidenflation has caused cuts of pork, beef, and chicken to skyrocket, but consumers are still buying.

Supermarket sales of refrigerated plant-based meat plummeted 14% by volume for the 52 weeks.

Orders of plant-based burgers at restaurants and other food-service outlets for the 12 months that ended in November were down 9% from three years earlier.

Beyond lost sales in almost every channel last quarter. Over the past year, it laid off more than 20% of its workforce.

None of the biggest fast-food chains that had announced partnerships with Beyond—KFC, Pizza Hut, and most importantly, McDonald’s—maintained a single permanent item on their US menus.

Even vegans don’t like eating this fake meat stuff and rather stick with real vegetarian food like lentils, avocado, tofu, beans, and hummus. Vegetarian Indian food like certain Indian curries is way better than any fake meat garbage Beyond can deliver to the consumer.

Even John Mackey, co-founder of Whole Foods Market Inc.—the grocer that had been instrumental in introducing the category—went on the record calling plant-based meat “super, highly processed foods.”

The secret is now out that this fake meat could be more harmful than real animal-based meat and at the very worst, the same grade of unhealthiness.

The momentum has dried up for fake meat and convincing Americans to substitute real beef for fake beef is like convincing an American to live in a tent and describe it as a newly built Toll Brothers home.

The fake meat industry loved to give analogies of how the milk industry created alternative milk like almond and soy that consumers gravitated towards.

However, they fail to mention that dairy products cannot be consumed by lactose-intolerant consumers and milk’s primary use as an ingredient, not a main course.

In the summer of 2019, BYND was trading at $200 per share which coincided with the height of its stardom.

Now shares are a bottom basement at $15 per share and the market cap is below $1 billion.

This is a poor company to invest long-term and shares will only move up in the short-term as the market senses a Fed pivot, but after that sucker's rally, investors will get out while they can as this fake meat industry is the new snake oil salesman of 2023.

Instead of buying fake meat technology companies, stick with stocks that sell real food like Costco (COST).

May 19, 2021

Tech Letter

Mad Hedge Technology Letter
May 19, 2021
Fiat Lux

Featured Trade:

(THE CURRENT STATE OF U.S. ECOMMERCE)
(AMZN), (WMT), (KR), (COST)

The Current State of U.S. eCommerce

Tech Letter

Was 2020 a one-hit-wonder for U.S. ecommerce sales?

Hardly so.

US retail ecommerce sales grew 33.6% in 2020, reaching $799.18 billion.

As the public health situation fizzles out, in-store shopping will refresh itself, and a share of consumer spending will revert away from retail and toward services like travel and live entertainment.

Consensus has it that U.S. ecommerce will grow 13.7% this year, reaching $908.73 billion, and although that would be a great year under normal circumstances, annualized growth of 13% appears pitiful compared to the pandemic numbers.

It was only at the beginning of 2020 that ecommerce was expected to grow 13.2% from 2019, but the health crisis ignited ecommerce sales to $799.18 billion.

Ecommerce growth from a much higher base is a hard endeavor as all the low-hanging fruit has been harvested and it’s just harder to push the needle higher.

What does this all mean?

Ecommerce represents a larger piece of the pie than ever before and that comes with greater influence.

I now expect ecommerce sales will account for 15.5% of the $5.856 trillion in total retail sales this year.

Ecommerce sales will surpass $1 trillion next year.

It also means that digital commerce has never been so strong in terms of a percentage growth basis, net total basis, and clout.

However, growth rates will need to moderate first before they can reaccelerate.

Looking at the financial year, look for sales to rise by a low single for the big-box retailer Walmart (WMT) showing that numbers are getting ahead of themselves.

Walmart is an accurate bellwether stock that gives us deep insight into the state of ecommerce, and they said it sees earnings rising by a high single-digit percent.

Guidance aside, Walmart had a great quarter.

Every segment performed well, and I am encouraged by traffic and grocery market share trends.

But customers clearly want to get out and shop which is why growth rates will most likely drop around 13% for ecommerce instead of staying north of 30%.

Walmart’s ecommerce continues to grow and stimulus in the U.S. had an outsized impact, and the second half has more uncertainty than a typical year because the reopening is a once-in-a-lifetime phenomenon and it’s hard to pinpoint the shake out.

Remember, there most likely will not be any broad-based stimulus payments in the 2^nd half of 2021 and 2022 that will be rolled into Walmart ecommerce sales.

Walmart is clearly chasing the leader of the pack Amazon.

Amazon is on track to become the largest retailer in the United States within the next four years, followed by the aforementioned Walmart and Kroger.

Kroger has been a fashionable pick amongst hedge fund managers in the beginning of 2021.

Amazon (AMZN) gross merchandise value sales (GMV) will top $631.6 billion by 2025, representing a compound annual growth rate of 14% between 2020 and 2025.

The same report showed us that Walmart’s ecommerce sales are set to grow at a five-year CAGR of 14.9% from $43.6 billion in 2020 to $87.5 billion in 2025, accounting for 16.7% of total retailer sales in 2025.

Ecommerce is the only channel that will grow in the next 5 years, everything else, such as offline retail will contract or go sideways at best.

It’s a death by a thousand cuts type of dilemma for anyone that isn’t in ecommerce.

Costco (COST), the fourth largest U.S. retailer, is expected to invest heavily in its digital business, with its online sales set to increase by 47% over the same period, reaching $15.3bn in 2025.

Over the next few years, Generation Z will age into adulthood and bring with them a digital wallet and firms will need to focus investment online and engage with the digital ecosystem in order to win market share.

Gen Z doesn’t use cash.

Online grocery is set to stay even in healthy times, but the pace of growth for online grocery will level off after the 2020 explosion.

Fresh grocery ecommerce is still expected to grow at 13.3% CAGR between now and 2025 which is why you see many retailers like Walmart investing in the fresh foods’ delivery business.

Habits are hard to break and it’s clear that digital add-ons are here to stay, and brands must cultivate digital platforms to win.

Summary - Tech LetterNovember 21, 2018

Tech Letter

Mad Hedge Technology Letter
November 21, 2018
Fiat Lux

Featured Trade:

(FIVE TECH STOCKS TO SELL SHORT ON THE NEXT RALLY)
(WDC), (SNAP), (STX), (APRN), (AMZN), (KR), (WMT), (MSFT), (ATVI), (GME), (TTWO), (EA), (INTC), (AMD), (FB), (BBY), (COST), (MU)

Five Tech Stocks to Sell Short on the Next Rally

Tech Letter

Next year is poised to be a trading year that will bring tech investors an added dimension with the inclusion of Uber and Lyft to the public markets.

It seemed that everything that could have happened in 2018 happened.

Now, it’s time to bring you five companies that I believe could face a weak 2019.

Every rally should be met with a fresh wave of selling and one of these companies even has a good chance of not being around in 2020.

Western Digital (WDC)

I have been bearish on this company from the beginning of the Mad Hedge Technology Letter and this legacy firm is littered with numerous problems.

Western Digital’s structural story is broken at best.

They are in the business of selling hard disk drive products.

These products store data and have been around for a long time. Sure the technology has gotten better, but that does not mean the technology is more useful now.

The underlying issue with their business model is that companies are moving data and operations into cloud-based products like the Microsoft (MSFT) Azure and Amazon Web Services.

Why need a bulky hard drive to store stuff on when a cloud seamlessly connects with all devices and offers access to add-on tools that can boost efficiency and performance?

It’s a no-brainer for most companies and the efficiency effects are ratcheted up for large companies that can cohesively marry up all branches of the company onto one cloud system.

Even worse, (WDC) also manufactures the NAND chips that are placed in the hard drives.

NAND prices have faltered dropping 15% of late. NAND is like the ugly stepsister of DRAM whose large margins and higher demand insulate DRAM players who are dominated by Micron (MU), Samsung, and SK Hynix.

EPS is decelerating at a faster speed and quarterly sales revenue has plateaued.

Add this all up and you can understand why shares have halved this year and this was mainly a positive year for tech shares.

If there is a downtown next year in the broader market, watch out below as this company is first on the chopping block as well as its competitor Seagate Technology (STX).

Snapchat (SNAP)

This company must be the tech king of terrible business models out there.

Snapchat is part of an industry the whole western world is attempting to burn down.

Social media has gone for cute and lovable to destroy at all cost. The murky data-collecting antics social media companies deploy have regulators eyeing these companies daily.

More successful and profitable firm Facebook (FB) completely misunderstood the seriousness of regulation by pigeonholing it as a public relation slip-up instead of a full-blown crisis threatening American democracy.

Snapchat is presiding over falling daily active user growth at such an early stage that usership doesn’t even pass 100 million DAUs.

Management also alienated the core user base of adolescent-aged users by botching the redesign that resulted in users bailing out of Snapchat.

Snapchat has been losing high-level executives in spades and fired a good chunk of their software development team tagging them as the scapegoat that messed up the redesign.

Even more imminent, Snapchat is burning cash and could face a cash crunch in the middle of next year.

They just announced a new spectacle product placing two frontal cameras on the glass frame. Smells like desperation and that is because this company needs a miracle to turn things around.

If they hit the lottery, Snap could have an uptick in its prospects.

GameStop (GME)

This part of technology is hot, benefiting from a generational shift to playing video games.

Video games are now seen as a full-blown cash cow industry attracting gaming leagues where professional players taking in annual salaries of over $1 million.

Gaming is not going away but the method of which gaming is consumed is changing.

Gamers no longer venture out to the typical suburban mall to visit the local video games store.

The mushrooming of broad-band accessibility has migrated all games to direct downloads from the game manufacturers or gaming consoles’ official site.

The middleman has effectively been cut out.

That middleman is GameStop who will need to reinvent itself from a video game broker to something that can accrue real value in the video game world.

The long-term story is still intact for gaming manufactures of Activision (ATVI), EA Sports (EA), and Take-Two Interactive (TTWO).

The trio produces the highest quality American video games and has a broad portfolio of games that your kids know about.

GameStop’s annual revenue has been stagnant for the past four years.

It seems GameStop can’t find a way to boost its $9 billion of annual revenue and have been stuck on this number since 2015.

If you do wish to compare GameStop to a competitor, then they are up against Best Buy (BBY) which is a better and more efficiently run company.

Then if you have a yearning to buy video games from Best Buy, then you should ask yourself, why not just buy it from Amazon with 2-day free shipping as a prime member.

The silver lining of this business is that they have a nice niche collectibles division that hopes to deliver over $1 billion in annual sales next year growing at a 25% YOY clip.

But investors need to remember that this is mainly a trade-in used video game company.

Ultimately, the future looks bleak for GameStop in an era where the middleman has a direct path to the graveyard, and they have failed to digitize in an industry where digitization is at the forefront.

Blue Apron

This might be the company that is in most trouble on the list.

Active customers have fallen off a cliff declining by 25% so far in 2018.

Its third quarter earnings were nothing short of dreadful with revenue cratering 28% YOY to $150.6 million, missing estimates by $7 million.

The core business is disappearing like a Houdini act.

Revenue has been decelerating and the shrinking customer base is making the scope of the problem worse for management.

At first, Blue Apron basked in the glory of a first mover advantage and business was operating briskly.

But the lack of barriers to entry really hit the company between the eyes when Amazon (AMZN), Walmart (WMT), and Kroger (KR) rolled out their own version of the innovative meal kit.

Blue Apron recently announced it would lay off 4% of its workforce and its collaboration with big-box retailer Costco (COST) has been shelved indefinitely before the holiday season.

CFO of Blue Apron Tim Bensley forecasts that customers will continue to drop like flies in 2019.

The company has chosen to focus on higher-spending customers, meaning their total addressable market has been slashed and 2019 is shaping up to be a huge loss-making year for the company.

The change, in fact, has flustered investors and is a great explanation of why this stock is trading at $1.

The silver lining is that this stock can hardly trade any lower, but they have a mountain to climb along with strategic imperatives that must be immediately addressed as they descend into an existential crisis.

Intel (INTC)

This company is the best of the five so I am saving it for last.

Intel has fallen behind unable to keep up with upstart Advanced Micro Devices (AMD) led by stellar CEO Dr. Lisa Su.

Advanced Micro Devices is planning to launch a 7-nanometer CPU in the summer while Intel plans to roll out its next-generation 10-nanometer CPUs in early 2020.

The gulf is widening between the two with Advanced Micro Devices with the better technology.

As the new year inches closer, Intel will have a tough time beating last year's comps, and investors will need to reset expectations.

This year has really been a story of missteps for the chip titan.

Intel dealt with the specter security vulnerability that gave hackers access to private data but later fixed it.

Executive management problems haven’t helped at all.

Former CEO of Intel Brian Krzanich was fired soon after having an inappropriate relationship with an employee.

The company has been mired in R&D delays and engineering problems.

Dragging its feet could cause nightmares for its chip development for the long haul as they have lost significant market share to Advanced Micro Devices.

Then there is the general overhang of the trade war and Intel is one of the biggest earners on mainland China.

The tariff risk could hit the stock hard if the two sides get nasty with each other.

Then consider the chip sector is headed for a cyclical downturn which could dent the demand for Intel chip products.

The risks to this stock are endless and even though Intel registered a good earnings report last out, 2019 is set up with landmines galore.

If this stock treads water in 2019, I would call that a victory.

The Unintended Consequences of the Euro Crash

Diary, Free Research, Newsletter

For those of you who heeded my expert advice to buy the ProShares Ultra Short Euro ETF (EUO) last July, well done!

You are up a massive 48%! This is on a move in the underlying European currency of only 18.5%.

My browsing of the Galleria in Milan, the strolls through Spanish shopping malls, and my dickering with an assortment of dubious Greek merchants, all paid off big time. It turns out that everything I predicted for this beleaguered currency came true.

The European economy did collapse. Cantankerous governments made the problem worse by squabbling, delaying and obfuscating, as usual.

The European Central Bank finally threw in the towel and did everything they could to collapse the value of the Euro and reinvigorate their comatose economies. This they did by imitating America?s wildly successful quantitative easing, which they announced with local variations last Thursday.

And now for the good news: The best is yet to come!

Europe is now six days into a strategy of aggressive monetary easing which may take as long as five years until it delivers tangible, sustainable results. That?s how long it took for the Federal Reserve?s QE to restore satisfactory levels of confidence in the US economy.

The net net is that we have almost certainly only seen the first act of a weakening of the Euro which may last for years. A short Euro could be the trade that keeps on giving.

The ECB?s own target now is obviously parity against the greenback, which you will find predicted in my own 2015 Annual Asset Class Review released at the beginning of January (click here).

Once they hit that target, 87 cents to the Euro will become the new goal, and that could be achieved sooner than later.

However, you will not find me short the Euro up the wazoo this minute. I think we have just stumbled into a classic ?Buy the Rumor, Sell the News? situation with the Euro.

The next act will involve the ECB sitting on its hands for a year, realizing that their first pass at QE was inadequate, superficial, and flaccid, and that it is time to pull the bazooka out of their pockets once again.

This is a problem when the entire investment world is short the Euro. That paves the way for countless, rip your face off short covering rallies in the months ahead. Any smidgeon or blip of positive European economic data could spark one of these.

Trading the Euro for the past eight months has been like falling off a log. It is about to get dull, mean and brutish. So for the moment, my currency play has morphed into selling short the Japanese yen, which has its own unique set of problems.

As for the unintended consequences of the Euro crash, the Q4 earnings reports announced so far by corporate America tells the whole story.

Companies with a heavy dependence on foreign (read Euro and yen) denominated earnings are almost universally coming up short. On this list you can include Caterpillar (CAT), Procter and Gamble (PG), and Microsoft (MSFT).

Who are the winners in the strong dollar, weak Euro contest? US companies that see a high proportion of their costs denominated in flagging foreign currencies, but see their incomes arrive totally in the form of robust, virile dollars.

You may not realize it, but you are playing the global currency arbitrage game every time you go shopping. The standout names here are US retailers, which manufacture abroad virtually all of the junk they sell you here, especially in low waged China.

The stars here are Macy?s (M), Family Dollar Stores (FDO), Costco (COST), Target (TGT), and Wal-Mart (WMT).

You can see this divergence crystal clear in examining the behavior of the major stock indexes. The chart for the Guggenheim S&P 500 Equal Weight ETF (RSP), which has the greatest share of currency sensitive multinationals, looks positively dire, and may be about to put in a fatal ?Head and Shoulders? top (see the following story).

The chart for the NASDAQ (QQQ), where constituent companies have less, but still a substantial foreign currency exposure, appears to be putting in a sideways pennant formation before eventually breaking out to new highs once again.

The small cap Russell 2000, which is composed of almost entirely domestic, dollar based, ?Made in America? type companies, is by far the strongest index of the trio, and looks like it is just biding time before it blasts through to new highs.

If you are a follower of my Trade Alert Service, then you already know that I have a long position in the (IWM), which has already chipped in 2.12% to my 2015 performance.

You see, there is a method to my Madness.