Posts

August 14, 2019

Global Market Comments
August 14, 2019
Fiat Lux

Featured Trade:

(HOW TO HANDLE THE FRIDAY, AUGUST 16 OPTIONS EXPIRATION),
(CRM), (FB), (M), (VIX)
(SILICON VALLEY REAL ESTATE SAYS THE BULL MARKET IN TECH CONTINUES)

July 19, 2019

Mad Hedge Technology Letter
July 19, 2019
Fiat Lux

Featured Trade:

(CLOUD 101)
(AMZN), (MSFT), (GOOGL), (DOCU), (CRM), (ZS)

CLOUD 101

If you’ve been living under a rock the past few years, the cloud phenomenon hasn’t passed you by and you still have time to cash in.

You want to hitch your wagon to cloud-based investments in any way, shape or form.

Amazon leads the cloud industry it created.

It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.

Amazon (AMZN) relies on AWS to underpin the rest of its businesses and that is why AWS contributes most of Amazon’s total operating income.

Total revenue for just the AWS division would operate as a healthy stand-alone tech company if need be.

The future is about the cloud.

These days, the average investor probably hears about the cloud a dozen times a day.

If you work in Silicon Valley, you can triple that figure.

So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let’s get into the basics of what the cloud actually is.

Think of this as a cloud primer.

It’s important to understand the cloud, both its strengths and limitations.

 Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest growing companies in the world.

Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that’s where I come in.

Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.

They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb proof.

As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.

The most important features of cloud storage are:

1) It is a service provided by an external provider.

2) All data is stored outside your computer residing inside an in-house network.

3) A simple Internet connection will allow you to access your data at anytime from anywhere.

4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect collaborative vehicle for our globalized world.

Once you start using the cloud to store a company’s data, the benefits are many.

No Maintenance

Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.

However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them – a costly proposition.

Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.

Instead, they can focus resources on the core aspects of their business where they can add the most value without worrying about managing IT staff of prima donnas.

Greater Flexibility

Today’s employees want to have a better work/life balance and this goal can be best achieved by letting them telecommute. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.

How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?

Cloud storage services such as Google Drive offer exactly this kind of flexibility for employees. According to a recent survey, 79% of respondents already work outside of their office some of the time, while another 60% would switch jobs if offered this flexibility.

With data stored online, it’s easy for employees to log into a cloud portal, work on the data they need to, and then log off when they’re done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it’s done.

It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.

Better Collaboration and Communication

In today’s business environment, it’s common practice for employees to collaborate and communicate with co-workers located around the world.

For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSignDropbox, and Google Drive make collaboration and document management a piece of cake.

These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.

Data Protection

Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City forcing many websites to shut down their operations for days.

The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.

It’s best to move data to the cloud to avoid such disruptions because there your data will be stored in multiple locations.

This redundancy makes it so that even if one area is affected, your operations don’t have to capitulate, and data remains accessible no matter what happens. It’s a system called deduplication.

Lower Overhead

The cloud can save businesses a lot of money.

By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that’s not to mention the maintenance costs it carries.

Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon’s AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.

 

 

 

July 12, 2019

Mad Hedge Technology Letter
July 12, 2019
Fiat Lux

Featured Trade:

(CLOUD SECURITY ON THE MARCH)
(OKTA), (ZS), (CRM), (AMZN)

Cloud Security on the March

Take a look at these beauties that I recommended at the beginning of December 2018.

At that time, Okta (OKTA) was trading at $62 and Zscaler (ZS) was at $40 on the button – fast forward to today and Okta is now over $136 and Zscaler victoriously sitting at $82.

Oh, how do times change!

That was my reaction watching their performance for the past 7 months giving belief to my assessment that second-tier cloud companies will have a field day this year.

Cloud companies aren’t going away anytime soon, please tattoo that on your forehead.  

There isn’t a hotter topic circulating the gossip winds these days than digital security pressured by geopolitics.

Okta is the best in show for identity management – a snazzy term for managing employees’ passwords.

Okta’s products are built on top of the Amazon Web Services cloud.

Coincidentally, Okta was erected in 2009 by a team of former Salesforce (CRM) executives. Salesforce is one of my favorite cloud-based software companies, offering a blueprint for success to other up-and-coming software companies.

Current Okta CEO and founder Todd McKinnon previously served as the Senior Vice President of Engineering at Salesforce.

Other founders include Okta COO Freddy Kerrest who also meandered through the corridors of Salesforce.

I can tell you that you could do much worse than starting a new software company with a collection of Salesforce upper echelon talent.

This all-star team is behind the insatiable growth of Okta whose revenue has grown over 600% since establishing itself.

Okta’s first-quarter results didn’t disappoint with revenues of $125 million—a rise of 50% year-over-year beating the consensus of $117 million.

Subscription revenues comprised 94% of sales and the company expects sales of $130 million amounting to a rise of 37% year-over-year.

Okta’s subscriber base has risen over 500% in the past 5 years and annual contract value of over $100,000 has expanded 60% annually.

The company still loses money but hopes to make some headway on this issue with projected EPS estimated to grow 25% annually in the next five years.

This year spawned a massive divergence between tech who has legs and tech who will be dragged down to the depths of the ocean floor by the heavy weight of regulation, overwhelming competition, or just flat out poor management or inferior product development.

Zscaler echoed similar positive sentiment of Okta by recording a quarter to remember growing revenue by 61% year-over-year while calculated billings grew 55% year-over-year.

In addition to the top line growth, operating margins improved 14% points year-over-year to 8%.

The quarterly results demonstrate the leverage in cloud security business models and the ability to drive growth and profitability.

String together a third consecutive quarter of profitability is just part of the battle, Zscaler will continue to aggressively invest for significant market opportunity that lie ahead.

Cloud security potential means going after a $20.3 billion Total Addressable Market in calendar 2019.

Let me divulge a tad bit about the competitive landscape and why Zscaler is brilliantly positioned for success.

As organizations increasingly make the shift to the cloud, traditional firewall and VPN vendors are finally acknowledging that the legacy security appliances can secure the new digital enterprise and are attempting to build a security cloud using single tenant software designed for on-premise appliances just like you can’t create a Netflix service by stacking thousands of DVD players in the cloud.

You can’t offer an inline high-performance security cloud by spinning up a bunch of virtual machines in a public cloud. This is a defensive strategy of cloud imitators which, in our view, serves the self-preservation of the vendor, not the needs of the customers.

Zscaler has a significant competitive advantage as a result of the technology, architecture and maturity of cloud security platform including one, Zscaler was born in the cloud, for the cloud just like Salesforce and Workday.

Two, Zscaler has a purpose built globally distributed multi-tenant cloud for fast user experience, unlike imitation cloud, Zscaler requires no back hauling from front doors to a central computing data center of a public cloud.

Three, Zscaler performs SSL inspection at scale as a purpose-built proxy for better security.

Lastly, Zscaler continues to deliver zero trust network access that provides application access without network access reducing business risk unlike firewalls and VPNs.

The duo of Okta and Zscaler are the bright lights of the cloud generation and leading the digital economy in digital security.

 

July 1, 2019

Mad Hedge Technology Letter
July 1, 2019
Fiat Lux

Featured Trade:

(THE DEATH OF HARDWARE)
(AAPL), (CRM), (NFLX), (HUAWEI)

The Death of Hardware

Apple’s Chief Design Officer Jony Ive, the British industrial designer who made Apple (AAPL) products beautiful, is on his way out.

What else could the man do?

Jonathan Paul Ive was born in Chingford, London in 2967 to a silversmith who lectured at Middlesex Polytechnic.

He pursed automotive design at Newcastle Polytechnic, now named University of Northumbria at Newcastle, and graduated with a BA in industrial design in 1989.

His student successes harvested him the RSA Student Design Award which gifted him a stipend for an exploratory trip to the United States.

Palo Alto, California was his ultimate destination where he befriended various design experts including Robert Brunner—a designer who ran a small consultancy firm that would later join Apple Computers.

Ive signed onto product design agency Roberts Weaver Group following his studies demonstrating his typical attention to detail that he became renowned for.

London startup design agency called Tangerine came calling and Ive used his talents to design microwave ovens, toilets, drills and toothbrushes.

Ive slammed into confict with management at Tangerine who believed his ideas were too modern and exorbitant.

Apple later decided to partner with Tangerine on the basis of some of Ive’s former Silicon Valley friends like Robert Brunner delivering Ive to the forefront of Apple design products where he started hatching his plan to be the ultimate designer at Apple.

The rest is history as Ive went on to produce memorable consumer product designs such as the iMac, iPod, iPhone, and iPad.

His last burst of creativity was applied to produce the Apple Watch which was an overwhelming success.

He will now take his show independent but still collaborate with Apple as his main client.

The new design firm will be called LoveFrom.

This announcement isn’t a shocker and certainly, he really had one foot out of the door ever since the passing of Former Co-Founder Steve Jobs in 2011 put him on less solid footing.

If you remember, Apple had a secret corridor constructed between Jobs’ and Ive’s office epitomizing how closely they collaborated on product development as well as how good of friends they were.

Current CEO of Apple Tim Cook is the exact opposite of what Steve Jobs represented and part of the reason why Apple has lacked that game-changing new product resulting in a reduced share price.

Steve Jobs was a visionary and the person to transform his ideas into physical form was Jony Ive.

You could argue that part of Jony Ive succumbed with Steve Jobs as well as his parabolic career trajectory.

That’s what all those lines of people camping overnight in front of Apple stores was about.

The cult of Apple was at its peak around 2012 where Apple sold the most iPhones and was miles ahead of competition.

Fast forward 7 years and Tim Cook has allowed the relative competition to catch up and even overtake Apple in numerous metrics.

I would argue that Tim Cook was a dependent stop gap to Steve Jobs but the lack of vision in a position where visionaries are rewarded has been Apple’s Achilles heel.

Surely, Apple could have hired an Elon Musk after Tim Cook steadied the rutter.

The results have been monetary success, milking the famed iPhone business for what it’s worth plus more, but missing the boat on premium content.

They could have bought Netflix (NFLX) while it was less potent with the glut of cash in reserve, or they could have penetrated the enterprise business with acquiring Salesforce (CRM) at an earlier stage.

And during this period, Chinese phone makers caught up big time with Huawei now offering a better and cheaper iPhone alternative.

What Jony Ive was leaving the headquarters of Apple represents is the death of hardware.

Out with the old and in the new, and the new is software and the direction Apple is doubling down on.

Apple’s services of iTunes, the App Store, the Mac App Store, Apple Music, Apple Pay, and AppleCare, has become Apple’s “new” business.

Apple’s services segment did sales of $11.5 billion in revenue, up from the $9.9 billion services earned in the second quarter of 2018.

A new all-time record was set for services revenue this quarter.

Apple Pay is available in 30 markets and expect to go live in 40 markets by the end of 2019.

Apple now boasts 390 million paid subscriptions across all of its services, an increase of 30 million sequentially and by 2020, Apple will pass half a million paid subscriptions.

Apple hopes to penetrate further into the magazine business with Apple News+, a $9.99 per month service that offers unlimited access to more than 200 magazines.

Apple plans to surpass $14 billion in services revenue per quarter by 2020.

This is what Apple is doing now and the sad fact is that Ive and his special skills do not fit seamlessly into the main growth drivers of the company anymore.

Software engineers are being cherrypicked left, right, and center as Apple avoids making any big capital investments aside from leasing new buildings to install an army of fresh programmers.

Apple reported $11.45 billion in services revenue topped analysts’ expectations of $11.37 billion.

Apple also reported services margins of 63.8% for the quarter.

Services now accounts for about 20% of Apple’s revenue, up from 16% a year earlier and 13% in the first quarter.

I will give Tim Cook credit for recovering from the 20% drop in Apple’s shares, better late than never.

Now Apple is in the process of shifting up to 30% of their supply chain from China to South East Asia to de-risk from the Middle Kingdom.

 

June 14, 2019

Global Market Comments
June 14, 2019
Fiat Lux

Featured Trade:

(WEDNESDAY JUNE 26 BRISBANE, AUSTRALIA STRATEGY LUNCHEON)
(MAY 29 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (BYND), (AMZN), (GOOG), (AAPL), (CRM), (UT), (RTN), (DIS), (TLT), (HAL), (BABA), (BIDU), (SLV), (EEM)

June 12 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader June 12 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Do you think Tesla (TSLA) will survive?

A: Not only do I think it will survive, but it’ll go up 10 times from the current level. That’s why we urged people to buy the stock at $180. Tesla is so far ahead of the competition, it is incredible. They will sell 400,000 cars this year. The number two electric car competitor will sell only 25,000. They have a ten-year head start in the technology and they are increasing that lead every day. Battery costs will drop another 90% over the next decade eventually making these cars incredibly cheap. Increase sales by ten times and double profit margins and eventually, you get to a $1 trillion company.

Q: Beyond Meat (BYND)—the veggie burger stock—just crashed 25% after JP Morgan downgraded the stock. Are you a buyer here?

A: Absolutely not; veggie burgers are not my area of expertise. Although there will be a large long-term market here potentially worth $140 billion, short term, the profits in no way justify the current stock price which exists only for lack of anything else going on in the market. You don’t get rich buying stocks at 37 times company sales.

Q: Are you worried about antitrust fears destroying the Tech stocks?

A: No, it really comes down to a choice: would you rather American or Chinese companies dominate technology? If we break up all our big tech companies, the only large ones left will be Chinese. It’s in the national interest to keep these companies going. If you did break up any of the FANGS, you’d be creating a ton of value. Amazon (AMZN) is probably worth double if it were broken up into four different pieces. Amazon Web Services alone, their cloud business, will probably be worth $1 trillion as a stand-alone company in five years. The same is true with Apple (AAPL) or Google (GOOG). So, that’s not a big threat overhanging the market.

Q: Is it time to buy Salesforce (CRM)?

A: Yes, you want to be picking up any cloud company you can on any kind of sizeable selloff, and although this isn’t a sizeable selloff, Salesforce is the dominant player in cloud plays; you just want to keep buying this all day long. We get back into it every chance we can.

Q: Do you think the proposed merger of United Technologies (UT) and Raytheon (RTN) will lower the business quality of United Tech’s aerospace business?

A: No, these are almost perfectly complementary companies. One is strong in aerospace while the other is weak, and vice versa with defense. You mesh the two together, you get big economies of scale. The resulting layoffs from the merger will show an increase in overall profitability.

Q: I had the Disney (DIS) shares put to me at $114 a share; would you buy these?

A: Disney stock is going to go up ahead of the summer blockbuster season, so the puts are going to expire being worthless. Sell the puts you have and then go short even more to make back your money. Go naked short a small non-leveraged amount Disney $114 puts, and that should bring in a nice return in an otherwise dead market. Make sure you wait for another selloff in the market to do that.

Q: What role does global warming play in your bullish hypothesis for the 2020s?

A: If people start to actually address global warming, it will be hugely positive for the global economy. It would demand the creation of a plethora of industries around the world, such as solar and other alternative energy industries. When I originally made my “Golden Age” forecast years ago, it was based on the demographics, not global warming; but now that you mention it, any kind of increase in government spending is positive for the global economy, even if it’s borrowed. Spending to avert global warming could be the turbocharger.

Q: Why not go long in the United States Treasury Bond Fund (TLT) into the Fed interest rate cuts?

A: I would, but only on a larger pullback. The problem is that at a 2.06% ten-year Treasury yield, three of the next five quarter-point cuts are already priced into the market. Ideally, if you can get down to $126 in the (TLT), that would be a sweet spot. I have a feeling we’re not going to pull back that far—if you can pull back five points from the recent high at $133, that would be a good point at which to be long in the (TLT).

Q: Extreme weather is driving energy demand to its highest peak since 2010…is there a play here in some energy companies that I’m missing?

A: No, if we’re going into recession and there’s a global supply glut of oil, you don’t want to be anywhere near the energy space whatsoever; and the charts we just went through—Halliburton (HAL) and so on—amply demonstrate that fact. The only play here in oil is on the short side. When US production is in the process of ramping up from 5 million (2005) to $12.3 million (now), to 17 million barrels a day (by 2024) you don’t want to have any exposure to the price of oil whatsoever.

Q: What about China’s FANGS—Alibaba (BABA) and Baidu (BIDU). What do you think of them?

A: I wanted to start buying these on extreme selloff days in anticipation of a trade deal that happens sometime next year. You actually did get rallies without a deal in these things showing that they have finally bottomed down. So yes, I want to be a player in the Chinese FANGS in expectation of a trade deal in the future sometime, but not soon.

Q: Silver (SLV) seems weaker than gold. What’s your view on this?

A: Silver is always the high beta play. It usually moves 1.5-2.5 times faster than gold, so not only do you get bigger rallies in silver, you get bigger selloffs also. The industrial case for silver basically disappeared when we went to digital cameras twenty years ago.

Q: Does this extended trade war mean the end for emerging markets (EEM)?

A: Yes, for the time being. Emerging markets are one of the biggest victims of trade wars. They are more dependent on trade than any of the major economies, so as long as we have a trade war that’s getting worse, we want to avoid emerging markets like the plague.

Q: We just got a huge rebound in the market out of dovish Fed comments. Is this delivering the way for a more dovish message for the rest of the year?

A: Yes, the market is discounting five interest rate cuts through next year; so far, the Fed has delivered none of them. If they delayed that cutting strategy at all, even for a month, it could lead to a 10% selloff in the stock market very quickly and that in and of itself will bring more Fed interest rate cuts. So, it is sort of a self-fulfilling prophecy. The bottom line is that we’re looking at an ultra-low interest rate world for the foreseeable future.

Good Luck and Good Trading.

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

 

 

 

 

 

 

June 11, 2019

Mad Hedge Technology Letter
June 11, 2019
Fiat Lux

Featured Trade:

(BIG TECH’S FEEDING FRENZY)
(CRM), (DATA), (GOOGL), (NFLX)