(CSCO) Archives

Why the Cloud is Where Trading Dreams Come True

Dreams don't often come true - but they do frequently these days.

Highly disruptive transformative companies on the verge of redefining the status quo give investors a golden chance to get in before the stock goes parabolic.

Traditional business models are all ripe for reinvention.

The first phase of reformulation in big data was inventing the cloud as a business.

Amazon (AMZN) and its Amazon Web Services (AWS) division pioneered this foundational model, and its share price is the obvious ballistic winner.

The second phase of cloud ingenuity is trickling in as we speak in the form of companies that focus on functionality, performance, and maintenance on the cloud platform.

This is a big break away from the pure accumulation side of stashing raw data in servers.

However, derivations of this type of application are limitless.

Swiftly identifying these applied cloud companies is crucial for investors to stay ahead of the game and participate in the next gap up of tech growth.

The markets' reaction to Spotify's (SPOT) and Dropbox's (DBX) hugely successful IPOs was head-turning.

Both companies finished the first day of trading firmly well above their respective, original opening prices -- or for Spotify, the opening reference price.

The pent-up momentum for anything "Cloud" has its merits, and these two shining stars will give other ambitious cloud firms the impetus to go public.

If Spotify and Dropbox laid an egg, momentum would have screeched to a juddering halt, and companies such as Pivotal Software would reanalyze the idea of soon going public.

Now it's a no-brainer proposition.

There are more than 40 more public cloud companies that are valued at more than a $1 billion, and more are in the pipeline.

To understand the full magnitude of the situation, evaluating recent IPO performance is a useful barometer of health in the tech industry.

The first company Zscaler (ZS) is an enterprise company focused on cloud security that closed 106% above its opening price when it went public this past March 16.

It opened up at $16 a share and finished the day at $33.

Zscaler CEO, Jay Chaudhry, audaciously rebuffed two offers leading up to the March 16 IPO. Both offers were more than $2 billion, and both were looking to acquire Zscaler at a discount.

The decision to forego these offers was a prudent move considering (ZS)s current market cap is around $3.3 billion and rising.

One of the companies vying for (ZS) was Cisco Systems (CSCO), which is also in the cloud security business. Cisco is looking to add another appendage to its offerings with the cash hoard it just repatriated from abroad.

Cisco has been willing to dip into its cash hoard by buying San Francisco-based AppDynamics for $3.7 billion in 2017, which specializes in managing the performance of apps across the cloud platform and inside the data center.

Cloud security is critical for outside companies to feel comfortable implementing universal cloud technology.

Storing sensitive data online in a storage server is also a risk and difficult to migrate back once on the cloud.

Without solid security to protect data, data-heavy companies will hesitate to vault up their data in a public place and could remain old-school with external data locations storing all of a firm's secrets.

However, this traditional approach is not sustainable. There is just too much generated data in 2018.

Cybersecurity has expeditiously evolved because hackers have become greatly sophisticated. Plus, they are getting a lot of free PR.

Data center and in-house applications secured operations by managing access and using an industrial strength firewall.

This was the old security model.

Security became ineffective as companies started using cloud platforms, meaning many users accessed applications outside of corporate networks and on various devices.

The archaic "moat" method to security has died a quick death, as organizations have toiled to ziplock end points that offer hackers premium entry points into the system.

Zscaler combats the danger with a new breed of security. The platform works to control network traffic without crashing or stalling applications.

As cloud migration accelerates, the demand for cloud security will be robust.

Another point of cloud monetization falls within payments.

Tech billing has evolved past the linear models that credit and debit in simplistic fashion.

SaaS (Software as a Service), the hot payment model, has gone ballistic in every segment of the cloud and even has been adopted by legacy companies for legacy products.

Instead of billing once for full ownership, companies offer an annual subscription fee to annually lease the product.

However, reoccurring payments blew up the analog accounting models that couldn't adjust and cannot record this type of revenue stream 10 to 20 years out.

Zuora (ZUO) CEO Tien Tzuo understood the obstacles years ago when he worked for Marc Benioff, CEO of Salesforce (CRM), during the early stages in the 90s.

Cherry-picked after graduating from Stanford's MBA program, he made a great impression at Salesforce and parlayed it into CMO (Chief Marketing Officer) where he built the product management and marketing organization from scratch.

More importantly, Tzuo built Salesforce's original billing system and pioneered the underlying system for SaaS.

It was in his nine years at Salesforce that Tzuo diagnosed what Salesforce and the general industry were lacking in the billing system.

His response was creating a company to seal up these technical deficits.

Other second derivative cloud plays are popping up, focusing on just one smidgeon of the business such as analytics or Red Hat's container management cloud service.

SaaS payment model has become the standard, and legacy accounting programs are too far behind to capture the benefits.

Zuora allows tech companies to seamlessly integrate and automate SaaS billing into their businesses.

Tzuo's last official job at Salesforce was Chief Strategy Officer before handing in his two-week notice. Benioff, his former boss, was impressed by Tzuo's vision, and is one of the seed investors for Zuora.

These smaller niche cloud plays are mouthwateringly attractive to the bigger firms that desire additional optionality and functionality such as MuleSoft, integration software connecting applications, data and devices.

MuleSoft was bought by Salesforce for $6.5 billion to fill a gap in the business. Cloud security is another area in which it is looking to acquire more talent and products.

If you believe SaaS is a payment model here to stay, which it is, then Zuora is a must-buy stock, even after the 42% melt up on the first day of trading.

The stock opened at $14 and finished at $20.

One of the next cloud IPOs of 2018 is DocuSign, a company that provides electronic signature technology on the cloud and is used by 90% of Fortune 500 companies.

The company was worth more than $3 billion in a round of 2015 funding and is worth substantially more today.

These smaller cloud plays valued around $2 billion to $3 billion are a great entry point into the cloud story because of the growth trajectory. They will be worth double or triple their valuation in years to come.

It's a safe bet that Microsoft and Amazon will continue to push the envelope as the No. 1 and No. 2 leaders of the industry. However, these big cloud platforms always are improving by diverting large sums of money for reinvestment.

The easiest way to improve is by buying companies such as Zuora and Zscaler.

In short, cloud companies are in demand although there is a shortage of quality cloud companies.

__________________________________________________________________________________________________

Quote of the Day

"The great thing about fact-based decisions is that they overrule the hierarchy." - said Amazon founder and CEO, Jeff Bezos

April 3, 2018

Diary, Newsletter

Global Market Comments
April 3, 2018
Fiat Lux

Featured Trade:
(TUESDAY, JUNE 12, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON),
(MARCH 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (TBT), (FXY), (GS), (FCX), (CSCO), (INTC), (NEM),
(RIGHTSIZING YOUR TRADING)

April 2, 2018

Diary, Newsletter

Global Market Comments
April 2, 2018
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOODBYE THE QUARTER FROM HELL),
(SPY), (INTC), (AMZN), (CSCO),
(MONDAY, JUNE 11, FORT WORTH, TEXAS, GLOBAL STRATEGY LUNCHEON),
(THE HARD/SOFT DATA CONUNDRUM)

Market Outlook for the Week Ahead, or Goodbye the Quarter from Hell

Diary, Newsletter, Research

Well, that was some quarter! Call it the quarter from hell.

For as long as most traders and investors can remember, they are losing money so far this year. And they promised us such a rose garden!

The S&P 500 made a valiant, and so far successful effort to hold at the 200-day moving average at $256. We saw an unprecedented four consecutive days of 2% moves.

Yet, with all that tearing of hair, banging of heads against walls, and ulcers multiplying like rabbits, the (SPY) dropped only 5 points since January, off 1.8%, a mere pittance. It's been a whole lot of work and stress for nothing.

So far, the (SPY) has been bracketed by the 50-day moving average on the upside at $272, and the 200-day moving average on the downside. It could continue like this for six more months, forming a very long triangle formation with a year-end upside breakout.

Is the market going to sleep pending the outcome of the November midterm congressional elections?

But here's the catch. We now live in the world of false breakouts and breakdowns, thanks to algorithms. It happened twice in February and March to the upside.

What follows false upside breakouts? How about false downside breakdowns, which may be on the menu for us in April.

My bet is that we'll see one of these soon, taking the (SPY) down as low as $246. Then we'll rocket back up to the middle of the range in another one of those up 100-point days.

What will cause such a catharsis? An escalation of the trade war would certainly do it. Or maybe just a random presidential tweet about anything.

That's why I have been holding fire so far on my volatility shorts and more aggressive longs in stocks.

What will I be buying? Amazon (AMZN), which has essentially an unlimited future. Thank the president for creating a rare 16% selloff and unique buying opportunity with his nonsensical talk about antitrust action.

On what exactly does Amazon have a monopoly? Brilliance?

I also will be taking a look at laggard legacy old tech companies such as Intel (INTC) and Cisco Systems (CSCO). And how can you not like Microsoft here (MSFT)?

Of course, the mystery of the week was the strength in bonds (TLT) taking yields for the 10-year Treasury down to 2.75%. This is in the face of a Treasury auction on Wednesday that went over like a lead balloon.

I think it's all about quarter end positioning more than anything. Some hedge funds have big losses in stocks and volatility trading to cover, and what better way to do it than take profits on bond shorts through buying.

I already have started selling into the rally.

The scary thing about the bond action is that it has accelerated the flattening of the yield curve, with the two-year/10-year spread now only 50 basis points.

It also brings forward the inversion of the yield curve. And we all know what follows that with total certainty: a bear market in stocks and a recession.

The data flow for the coming week is all about jobs, jobs, jobs.

On Monday, April 2, at 9:45 AM, we get the March PMI Manufacturing Index.

On Tuesday morning, we receive March Motor Vehicle Sales, which have recently been weak at 17.1 million units.

On Wednesday, April 4, at 8:15 AM EST, the first of the trifecta of jobs reports comes out with the ADP Employment Report, a read on private sector high.

Thursday, April 5, leads with the Weekly Jobless Claims at 8:30 AM EST, which hit a new 49-year low last week at an amazing 210,000.

At 7:30 AM we get the March Challenger Job Cut Report.

On Friday, April 6, at 8:30 AM EST, we get the Big Kahuna with the March Nonfarm Payroll Report. Last month brought shockingly weak figures.

The week ends as usual with the Baker Hughes Rig Count at 1:00 PM EST. Last week brought a drop of 2.

As for me, I am headed up to Lake Tahoe, Nev., today for spring break to catch the last of the heavy snow. After a record 18 feet in March, Squaw Valley, Calif., has announced that it is keeping the ski lifts open until the end of May.

Good Luck and Good Trading.

March 26, 2018

Diary, Newsletter

Global Market Comments
March 26, 2018
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WEEK THAT WASHINGTON FINALLY MATTERED),
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
(TESTIMONIAL)

My Briefing from the Joint Chiefs of Staff

Diary, Newsletter

I have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals.

So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, who is known as ?Hoss? to his close subordinates.

Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes.

As he spoke, I was ticking off the stock, ETF and futures plays that would best capitalize on the long term trends he was outlining.

The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO) and (PANW). Peer nation states, like Russia, are no longer the main concern.

Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off a 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.

The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general.? However, the 30,000-man surge there brought a dramatic improvement on the ground situation.

Iran is a big concern and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.

Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.

Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites.?

We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.??

The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI).? The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.

I left the dinner with dozens of ideas percolating through my mind, which I will write about in future letters.

Why There is No Bubble in Stocks

Diary, Newsletter, Research

One couldn?t help but notice the outbreak of recollection, reminiscing and schadenfreude that took place yesterday when the NASDAQ briefly tipped over 5,000.

I remember it like it was yesterday. I am still amazed by the frenzy that took place, witnessing the kind of bubble one only sees twice a century. And I was right in the thick of it, living in nearby Silicon Valley.

Business school students were raising $50 million with a one-page business plan. An analyst predicted that Amazon (AMZN) shares would double to $400 in a year. It happened in only four weeks.

All of my attorneys quit, taking up prestige jobs as chief legal counsels at new start ups, taking stock in lieu of pay, dollar bills dancing in front of their eyes. They were replaced by the ?B? team. Other law firms started accepting stock as payment of legal fees.

I knew more than one office secretary who took pay cuts to $15,000 a year in exchange for stock, which they later sold for $2 million.

When I tried to expand my company, I couldn?t find a larger office to rent. San Francisco had run out of office space. So I bought a house for $7 million instead and worked from there. That was no problem, as everyone had $7 million then.

But what I remember most fondly were the parties. The beneficiaries of every IPO sought to celebrate with the biggest party in Bay Area history, each one eclipsing the last. An entire industry of creative party organizers sprung up, seeking to outdo every competitor.

I remember most fondly the Vodka luge carved out of a giant block of ice, where a pretty hostage poured 100 proof super cooled rocket fuel straight down your throat. By midnight, the passed out bodies started piling up on the periphery.

Those were the days!

Which brings us to today, when handwringing is breaking out all over. Investors are afraid that we are just now putting in the double top of the century in NASDAQ, with a very neat 15 years taking place between peaks.
Is it time to sell?

I think not.

Today, we see a completely different world from the one we knew in 2000. Global GDP then was a mere $32 trillion. Today it is 2.5 times higher at $78 trillion. Using this simplistic measure, the GDP adjusted value of NASDAQ should be 12,187.

The high tech index peaked at a price earnings multiple of 100 times earnings. Today it is 30 times. That means the multiple adjusted high for NASDAQ today would be 16,650.

Technology stocks then didn?t pay dividends. Today, look at Apple (AAPL), which pays a 1.50% dividend worth $11.25 billion in annual payouts. This revenue stream provides enormous support under the market, and almost makes Apple shares perform more like bonds than stocks.

Which brings me to a new investment thesis.

What if the stocks that peaked in 2000 are only now just breaking out and starting long bull runs? I am thinking of quality technology names that have completed long, sideways, basing moves. Ebay (EBAY), Broadcom (BRCM), and Cisco (CSCO) leap to the fore.

The possibilities boggle the mind.

I think that in order to get NASDAQ to really get the bit between its teeth, one thing has to happen. Apple has to stop going up.

You really only had to make one stock call in 2014. You had to be overweight Apple. If you did, you were a star. If you didn?t, then you are still probably looking for a new job on Craig?s List.

Managers are behaving as if the past were a prologue, loading the boat with Apple with their eyes firmly fixed on the rear view mirror. That explains the blowout 13% jump in Steve Jobs? creation so far in 2015, some $90 billion in market capitalization.

All you need is for investors to stop buying Apple for 15 minutes and rotate into other big tech names. That was my logic behind my Trade Alert to buy Cisco two weeks ago. If that occurs, it will be off to the races for NASDAQ once again.

Remember that old saw in technical analysis land, ?the longer the base, the bigger the air above it.?

A vodka martini, anyone?

The Spring in Cisco?s System?s Step

Diary, Newsletter, Research

I thought I noticed a spring in the step of Cisco Systems (CSCO) CEO John Chambers when he strutted out on TV to announce earnings last week.

Revenue came in just shy of $12 billion, a 7% improvement over fiscal 2014's Q2, and earnings per share really popped -- up 70% on a GAAP basis (including one-time items) to $2.4 billion from the prior year's "paltry" $1.4 billion.

Yikes!

Business in the US for the router and telecommunication company is going gangbusters. What is more important is the Chambers is seeing ?green shoots? is Europe, which has been a drag on the company?s earnings over the past several years.

This all presents important implications for the health of the global economy, which could be about to get dramatically better. Bring Europe, Japan, and China online, and we?re there.

It all fits in nicely with my own bullish forecasts for stocks in 2015. This has major implications for your own investment portfolio.

Cisco?s hardware is essential for connecting America?s 336 million cell phones. The Broadband spectrum needed for these devices to talk to each other is the new raw material of the 2000?s, replacing the oil, coal, and steel of an earlier century.

Cisco Systems (CSCO) believes that data delivered to mobile devices will skyrocket, from 4.2 billion gigabytes this year to a breathtaking 24.3 billion gigabytes by 2019 (or 24.2 Exabytes if you are interested). That is a fivefold increase in five years.

Blame all those kids watching full-length high definition motion pictures on their cell phones. My own tracking of share prices is no doubt making its contribution.

That means that at the current rate of capital investment, the US will completely run out of broadband capacity sometimes in 2018.

The answer? A lot more investment spending on all things broadband. This includes, the pipes, fiber optic cable everywhere, transmission towers, repeaters, and of course, lots of new routers.

This is all great news for Cisco.

Indeed, this is creating a gold rush for new spectrum as investors rush to buy the few free frequencies that are left.

In January, the Federal Communications Commission (FCC) auctioned off some government owned airwaves. It expected to receive $15 billion for the Licenses. What did it get? An eye popping $44.9 billion.

This is a game changer, and is enough to pay off 10% of this year?s total federal budget deficit. No doubt, they were popping the Champaign at the Treasury Department.

This has whetted appetites for a much larger auction due in 2016 or 2017, when the government sells off its last pieces of useable bandwidth. Like highly valued beachfront property, they?re not making it anymore.

Having covered the computer industry for nearly 50 years, I find all this fascinating. Processing advances have been driven by Moore?s law since 1965. That?s when Intel?s Gordon Moore predicted that computing speed would double every 2 years, while costs halved for the indefinite future. He later amended his theory to 18 months. Here we are in 2015, and he has proved dead on correct.

Telecommunications has its own version. Motorola engineer, Marty Cooper, invented the mobile phone in 1973. He has calculated that ?spectral efficiency? has doubled every 2 ? years since Guglielmo Marconi made his first broadcast in 1910.

Since then, efficiencies have improved by a trillion-fold. Analysts now refer to this forecast as ?Cooper?s Law.?

The logic in picking strikes for the Cisco Systems (CSCO) March, 2015 $27-$29 in-the-money vertical bull call spread is that we can trade against the gap created by the blowout earnings announcement.
With the market having the bit between its teeth, I doubt we will retrace that gap anytime soon.

To visit Cisco?s home page, please click here at http://www.cisco.com/c/en/us/index.html.

Way to Go Marty

My Briefing from the Joint Chiefs of Staff

Diary, Newsletter

I have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals. So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, and known as ?Hoss? to his close subordinates.

Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces, and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes. As he spoke, I was ticking off the stock, ETF, and futures plays that would best capitalize on the long term trends he was outlining.

The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO), and (GOOG). Peer nation states, like Russia, are no longer the main concern. Budgeting for military expenditures is a challenge in the midst of the worst economic environment since the Great Depression.

Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.

The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general. However, the 30,000-man surge there brought a dramatic improvement on the ground situation.

Iran is a big concern, and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.

Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.

Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites. We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.?

The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI). The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.

I left the dinner with dozens of more ideas percolating through my mind, which I will write about in future letters.

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