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The Market Outlook for the Week Ahead, or Welcome Back from Your Cruise

I have long advocated a long cruise as the best of all long-term investment strategies. After all, over the past 100 years, stocks have gone up 80% of the time, including the last Great Depression and WWII. Almost all news is negative, so ignoring should boost your investment returns immensely.

The last six months offer the most recent example. If you had departed on February 14 and return on Friday, August 14, the index return would have been absolutely zero, but you would have collected 1% in dividends. If you had been overweight in technology and biotech stocks, as I have been advocating for the past decade, you would have been up 20-30%.

Of course, this year, cruising presented its own risks, not from a sinking ship, pirates, or the norovirus, but from Covid-19. Many guests departed in the best of spirits to return DOA in the ship’s overcrowded meat locker.

The stock markets are offering more than the usual amount of risks as well. Think of an irresistible force, massive liquidity, meeting the immovable object, record-high valuations.

Only action in Washington could break this stalemate to the upside, a deal between the House and the White House that brings yet another stimulus package. Most of whatever money gets approved will head straight for the stock market, either directly or indirectly. Until then, we will be trapped in a narrow range.

These conditions could last into September, or until after the election. Nobody knows. That’s why eight of my nine positions expire on Friday, in four trading days.

Trump took executive action to help the economy but offers not a penny in funding. He expects states running record deficits to pay for a big chunk. It’s a symbolic act that will have no impact on the economy. The bottom line is no more stimulus for the economy. Stocks will hate it. Trump fiddles while America burns.

A bond market collapse is imminent, with record new issuance in the coming week and a strong July Nonfarm Payroll Report last Friday. Expect ten-year Treasury yields to go back to 0.95% and prices to collapse. Inflation is ticking up, with Consumer prices rising to 1.6% YOY. Fed buying of $80 billion a month is already in the price. I am selling short the (TLT).

Warren Buffet was a major buyer of His own stock, picking up a record $5.1 billion worth of Berkshire Hathaway (BRK/B). With $146.6 billion in cash on hand, what else is he going to do? Berkshire Class A shares were down 7.4% for the year through Friday’s close, compared with the 3.7% gain in the S&P 500. It’s his way of betting on the long-term future of industrial America at a discount.

Russia claimed Covid-19 Vaccine, causing stocks to pop. The rotation trade continues with a vengeance, with tech (I’m short), bonds (I’m short), and gold down big and “recovery” stocks like cruise lines, hotels, restaurants, and banks (I’m long) on a tear. Some $5 trillion in cash is pouring in from the sidelines, so there is only “UP” and “UP BIG”. (SPY) hit a new all-time high.

Tesla announced 5:1 stock split on August 21, which is the options expiration day. Long expected, it is just the latest in a series of Elon Musk attacks against the shorts, of which I am now one. The shares are up only 7% on the announcement. The impact won’t be so great, as it only takes the shares back to where they were in March.

Biden picked Kamela Harris as VP. It is the safe choice, not that California was ever in doubt in the electoral college. A moderate choice clearly takes aim at the conservative Midwest. Markets will rally because she is not Elisabeth Warren, who would have pilloried the banks and big tech and is essentially anti-capitalist.

College Football is postponed for 2020-2012, delivering a $4 billion hit to sponsoring colleges and another drag on GDP. No more free Corvettes for USC players. It's another example of local government taking the lead on Corona measures where the federal government is totally absent.

Van Eck targets $3,400 for gold. One of the original players in gold mutual funds who I know from the big bull market during the 1970s sees a 72% increase in the barbarous relic coming. With the government running the printing presses 24/7 to end the Great Depression collapsing the US dollar, it’s a no-brainer.

Consumer Prices unexpectedly jump, up 0.6% in July and 1.6% YOY. It’s a legitimate “green shoot” and provided yet another reason for the recovery trade. Rebounding inflation is always a great time to be short the US Treasury bond market (TLT). Keep selling every rally in the (TLT).

Retail Sales jump 1.2% in July, despite rising Corona cases, taking it back above pre-pandemic levels. Industrial Production picked up 3%. A lot was bought on credit. The problem is that all of those stimulus and unemployment dollars are now gone. In the meantime, further aid is frozen in Washington. No shopping, no growth.

Weekly Jobless Claims drop below one million for the first time since March. It’s still terrible, but it’s progress. Take what you can get. However, the rate of decline is flagging, and the next report could well bring an upturn.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.

Nothing refreshes and clears the mind like a vacation.

As a result, my Global Trading Dispatch blasted through to a substantial new all-time high. August is running at a blistering 6.03%, delivering a 2020 year to date of 34.66%, versus -2.00% for the Dow Average. That takes my eleven-year average annualized performance to a new all-time high of 36.61%. My 11-year total return has rocketed to 390.57%.

It certainly helped being short big tech (AAPL), (AMZN), (FB), short US Treasury bonds (TLT), (TBT), long banks (JPM), (BAC), and long gold (GLD).

The only numbers that count for the market are the number of US Corona virus cases and deaths, which you can find here.

On Monday, August 17 at 8:30 AM EST, the August New York Empire State Manufacturing Index is published.

On Tuesday, August 18 at 8:30 AM EST, Housing Starts for July are released.

On Wednesday, August 19 at 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.

On Thursday, August 20 at 8:30 AM EST, the Weekly Jobless Claims are announced.

On Friday, August 14, at 10:00 AM EST, Existing Home Sales for July are printed. At 2:00 PM The Bakers Hughes Rig Count is released.

As for me, with six days of 100-degree temperatures forecast, I attempted to go to the beach. A car crash on the Richmond Bridge trapped me in traffic for an hour. By the time I made it to the coast, the beaches were unreachable, thanks to unprecedented crowding.

With the local real unemployment rate at 25%, people have a lot of free time on their hands these days. It’s all part of the times we live in.

Stay healthy,

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

August 14, 2020

Tech Letter

Mad Hedge Technology Letter
August 14, 2020
Fiat Lux

Featured Trade:

(BIG TECH AND THE FUTURE OF COLLEGE CAMPUSES)
(SPG), (AMZN), (APPL), (MSFT), (FB), (GOOGL)

Big Tech and the Future of College Campuses

Tech Letter

The genie is out of the bottle and things will never go back to how they once were. Sorry to burst your bubble if you thought the economy, society, and travel rules would just revert to the pre-coronavirus status quo.

They certainly will not.

One trend that shows no signs of abating is the “winner take all” mentality of the tech industry.

Tech giants will apply their huge relative gains to gut different industries.

Once a shark smells blood, they go in for the kill; and nothing else will suffice until these revenue machines get their way in every other adjacent industry.

Recently, we got clarity on big box malls becoming the new tech fulfillment centers with the largest mall operator in the United States, Simon Property Group (SPG), signaling they are willing to convert space leftover in malls from Sears and J.C. Penny.

Then I realized that another bombshell would hit sooner rather than later.

College campuses will become the newest of the new Amazon, Walmart, or Target eCommerce fulfillment centers starting this fall, and let me explain to you why.

When the California state college system shut down its campuses and moved classes online due to the coronavirus in March, rising sophomore Jose Garcia returned home to Vallejo, California where he expected to finish his classes and hang out with friends and family.

Then Amazon announced plans to fill 100,000 positions across the U.S at fulfillment and distribution centers to handle the surge of online orders. A month later, the company said it needed another 75,000 positions just to keep up with demand. More than 1,000 of those jobs were added at the five local fulfillment centers. Amazon also announced it would raise the minimum wage from $15 to $17 per hour through the end of April.

Garcia, a marketing and communications major, applied and was hired right away to work in the fulfillment center near Vallejo that mostly services the greater Bay Area. He was thrilled to earn extra spending money while he was home and doing his schoolwork online.

This is just the first wave of hiring for these fulfillment center jobs, and there will be a second, third, and fourth wave as eCommerce volumes have exploded. Even college students desperate for the cash might quit academics to focus on starting from the bottom in Amazon.

Even though many of these jobs at Amazon fulfillment centers aren’t those corner office job that Ivy League graduates covet, in an economy that has had the bottom fall out from underneath, any job will do.

Chronic unemployment will be around for a while and jobs will be in short supply.

When you marry that up with the boom in ecommerce, then there is an obvious need for more ecommerce fulfillment centers and college campuses would serve as the perfect launching spot for this endeavor.

The rise of ecommerce has happened at a time when the cost of a college education has risen by 250% and, more often than not, doesn’t live up to the hype it sells.

Many fresh graduates are mired in $100,000 plus debt burdens that prevent them from getting a foothold on the property ladder and delays household formation.

Then consider that many of the 1000s of colleges that dot America have borrowed capital to the hills building glitzy business schools and rewarding the entrenched bureaucrats at the school management level outrageous compensation packages.

The cost of tuition has risen by 250% in a generation, but has the quality of education risen 250% during the same time as well?

The answer is a resounding no, and there is a huge reckoning about to happen in the world of college finances.

America will be saddled with scores of colleges and universities shutting down because they can’t meet their debt obligations.

Not to mention the financial profiles of the prospective students have dipped by 50% or more in the short-term with their parents unable to find the money to send their kids to college.

Then there is the international element here with the lucrative Chinese student that added up to 500,000 total students attending American universities in the past.

They won’t come back after observing how America basically shunned the pandemic and the U.S. public health system couldn’t get out of the way of themselves after the virus was heavily politicized on a national level.

The college campuses will be carcasses with mammoth buildings ideal to be transformed into eCommerce inventory centers.

The perfect storm is hitting on every side for Mr. Jeff Bezos to go in and pick up a bunch of empty college campuses for pennies on the dollar as the new Amazon fulfillment centers.

This will happen as the school year starts and schools realize they have no pathway forward and look to liquidate their assets.

Defaults will happen by the handful in the fall, while some won’t even open at all because too many students have quit.

Then the next question we should ask is: will a student want to pay $50,000 in tuition to attend online Zoom classes for a year?

My guess is another resounding no.

By next spring, there will be a meaningful level of these college campuses that are repurposed, as eCommerce delivery centers with the best candidates being near big metropolitan cities that have protected white collar jobs the best.

The coronavirus has exposed the American college system, b as university administrators assumed that tuition would never go down.

Not every college has a $40 billion endowment fund like Harvard to withstand today’s financial apocalypse.

It’s common for colleges to have too many administrators and many on multimillion-dollar packages.

These school administrators made a bet that American families would forever burden themselves with the rise in tuition prices just as the importance of a college degree has never been at a lower ebb.

Like many precarious industries such as college football, commercial real estate, hospitality, and suburban malls, college campuses are now next on the chopping block.

Big tech not only will make these campuses optimized for delivery centers but also gradually dive deep into the realm of educational revenue, hellbent on hijacking it from the schools themselves as curriculum has essentially been digitized.

Colleges will now have to compete with the likes of Google (GOOGL), Facebook (FB), Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT) directly in terms of quality of digital content since they have lost their physical presence advantage now that students are away from campus.

Tech companies already have an army of programmers that in an instance could be rapidly deployed against the snail-like college system.

The only two industries now big enough to quench big tech’s insatiable appetite for devouring revenue is health care and education.

We are seeing this play out quickly, and once tech gets a foothold literally on campus, the rest of the colleges will be thrust into an existential crisis of epic proportions with the only survivors being the ones with large endowment funds.

It’s scary, isn’t it?

This is how tech has evolved in 2020, and the tech iteration of 2021 could be scarier and even more powerful than this year’s iteration. Imagine that!

AMAZON PACKAGES COULD BE DELIVERED FROM HERE SOON!

August 14, 2020

Diary, Newsletter, Summary

Global Market Comments
August 14, 2020
Fiat Lux

Featured Trade:

(AUGUST 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (TLT), (TSLA), (AAPL), (FB), (AMZN), (VXX), (VIX), (JPM), (BAC), (GDX), (NUGT), (MRNA), (BRK/B), (SLV), (FCX)

August 12 Biweekly Strategy Webinar Q&A

Diary, Newsletter

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

Q: I just joined your service. Can you explain the logic to your current model trading portfolio?

I always try to balance long positions with short position. That greatly mitigates the risk of an out-of-the-blue crash, like we saw in February. Also, every individual position has a long and short, further reducing volatility. And you never can lose more money than you put up, so your risk is defined. That’s another classic risk control measure.

There is a further four hedge in that the portfolio is spread across all asset classes. So, I am long banks (JPM), (BAC), short US Treasury bonds (TLT), short a basket of big tech stocks (AAPL), (AMZN), (FB) and long gold (GLD). Something is always working where you can take profits. Our proprietary Mad Hedge Market Timing Index is always a big help in judging the best time to enter and exit these asset classes.

That is the short course on hedge fund risk management 101.

Q: Is it a good time to add in gold (GLD) here?

A: Yes, my long-term target for gold is $3,000/oz, possibly higher—it’s very common once you get a breakout from a 7-year bottoming process to get a big move like that. You always go back and retest that breakout level, that’s what’s happening now. I would use this dip to buy gold. You can look at (GLD) itself, the (GDX) gold miners which will give you 4:1 leverage over gold, or any of the 2x or 3x gold leveraged ETFs like (NUGT). There are lots of ways to play gold this time left from over the last bull market in gold ten years ago. So yes, bullish on gold with a temporary pullback in store. This recovery trade, which is buying banks, casinos, hotels, restaurants, weak dollar, weak buy market, weak gold—this is all temporary, this is just a trade. Those will all reverse themselves, probably by September if not sooner. So, if you missed the first round in the gold bull market, there’s certainly another chance to get back in.

Q: Do you think Biden and Harris will crash the stock market if elected?

A: No, since Biden started to run away in the polls, the stock market basically went straight up every day, and I prefer the stock market’s judgment on these things to opinion polls or talking heads. As far as Harris is concerned, she was the most middle of the road conservative pick of the 12 or so people they were looking at for vice president. Certainly, she’s a favorite with Wall Street, and isn’t it interesting they’re looking for the talents of a prosecutor in the White House? Who do you think they have in mind? So yes, that’s a net positive for the market. If anything, a new administration will bring a whole new round of Quantitative Easing and deficit spending, except it will be focused on bailing out Main Street, not Wall Street.

Q: Is the vaccine drug maker Moderna (MRNA) overbought here at 70?

A: Yes, I think to get any more appreciation you need to get an actual result on the many vaccines that are out there.

Q: Will Tesla (TSLA) pass 2,000 by year end?

A: I tend not to think so; Tesla had a once-in-a-lifetime 10-fold increase over a year. That is a very big move to digest, and while I’m saying people should keep their Tesla longs for the long term, short term you want to be selling calls against your long positions to hedge any downside and to take in some extra income.

Q: What caused ten-year US Treasury yields (TLT) to jump 14% yesterday? What will yields do from here?

A: Yields will go up and retest the 95-basis point level we saw a couple of months ago. That means we’re going to have a clear shot at adding shorts, probably for the next several weeks or months.

Q: I got the first TLT trade, but when I added the second one, I had to automatically close out my 175 short position to add the long 175 put position.

A: That is the correct way to do this. And what you end up with is a wider spread with a much larger size. So, you take all three positions we currently have, and you now have a (TLT) August $170-177.5 bear put spread in triple the original size and triple the profit, which expires in 5 trading days. It’s a trade with a very high return over a very short time frame. It’s the kind of trade that’s only available with very high volatilities in the market—at $25 in the (VIX), and you get very high accelerated time decay going into the close. So, it really was a two-week expiration play on the (TLT).

Q: Apple (AAPL) has been able to avoid any major damage in its share price in this trade war. How long can it last?

A: It can last 3 more months, until the election. It’s really quite amazing that the Chinese have not retaliated against Apple in all of these trade wars, and the reason for this is that Apple employs a million people in China, and they make a ton of money out of it. Apple has also managed their relationship with the communist government perfectly. So, that’s why they haven’t been hit. General Motors, other US companies—they could get expropriated. If the US can expropriate TikTok, what’s to stop China from expropriating General Motors, Starbucks, or even Apple for that matter?

Q: How do we know who has a real vaccine and who has a fake one? There’s so much information out there, I have a hard time filtering through what is real.

A: Wait for 100,000 people to try it out first—that’s what my plan is. That will be the safe way to do it. And if that means quarantining another couple of months to make sure you get the real deal, it’s worth the investment. Most industry safety standards, like animal trials, have been ditched by the FDA in order to get Trump a vaccine before the election. Putin is doing the same in Russia.

Q: Why is Warren Buffet buying back shares of Berkshire Hathaway (BRK/B) in record amounts? Is it because he sees no good investments?

A: He’d rather buy his own shares at parity or at a small premium than pay record PE multiples for essentially anything else in the market. Because the government rushed in so quickly to support the stock market, there never were any real deals in stocks, they never really got cheap. Yes, it sounds like down 40% in 2 months is cheap, but stocks weren’t, not even close to cheap, on a PE multiple basis. We never got close to the 9 ½X we saw in 2009. Also, if you believe in a recovery play, the ultimate recovery play is Berkshire Hathaway because they own predominantly old-line industrial cash flow stocks, which will lead any real recovery in the economy. So, at this point, Berkshire Hathaway will probably get you a higher return on a 12-month view than say Apple, Facebook or Amazon.

Q: Gold (GLD) vs Silver (SLV)? Which is better? And what about Copper (FCX)?

A: Silver always outperforms gold by at least 2 to 1 in any real economic recovery. Copper prices have risen 30% in 4 months; that is discounting a real economic recovery someday, so I would be buying copper on dips also.

Q: How do we learn more about options?

A: I suggest you go to the “How to Trade” section on our website, and that has links. Every trade alert we send out also has a link to a video that tells you exactly how to do the options part of that trade. And if you don’t want to do options, we also propose ETF and single stocks.

Q: What year end effect on the market do you see from a Biden tax plan on long term capital gains and qualified dividends at the ordinary income rate?

A: Well, if he actually proposes that, there will be a rush to sell assets by the end of the current year so people can take advantage of the very favorable capital gains tax that exist now. However, it’s not known whether that is actually the tax increase he’s proposing; it’s more likely he’ll simply return to the pre-Trump tax rates. However, I do expect him to come up with highly punitive tax rates on any real estate-related investment as a way of getting back at Trump. And that’s like loss carry forwards, steps up in the cost basis, 1031 exchanges—things specific to the real estate industry.

Q: If you think markets are going to come off, why aren’t you more aggressive buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?

A: (VXX) has become such a professional market it really has become a day trading vehicle. It’s hard to get customers in and out of this thing fast enough to make them money, as most of my followers are not set up to be day traders. It’s a market where 90% of the professionals are playing from the short side, so when you get moves up, they essentially happen over 1 or 2 days, and then they spend weeks or months bleeding off. It really is a tough trade for a retail trader to do; and it is an area where the insiders in Chicago trade this thing and really do have an in-house advantage that I would rather not try to bet against.

Q: I sold the top on all precious metals positions and started buying back today. Was that the right thing to do?

A: Yes, I have a feeling it is. Start scaling in—if you’re nervous about buying gold here, buy a third of a position now, a third if it’s higher or lower, and a third if it’s higher or lower again. That’s what any pro would do.

Q: Do you see another big economic crisis in 2021?

A: I don’t think so; I think any continued weakness will be hit with massive liquidity from the Fed and more government spending. Now that they found the model to keep the economy going, they’re going to just keep at it, no matter who is in power. Roosevelt kept at it for 5 years to end the Great Depression, until he was bailed out by WWII, so hopefully we don’t have to bail our economy out the same way with WWIII.

Q: What about Bitcoin here?

A: We don’t trade Bitcoin as we think the whole thing is a giant scam. There’s also no value added by anyone. Insiders have a huge advantage, the people who are creating the bitcoin to sell. So, it’s a security with no fundamentals—thus unanalyzable.

Good Luck and Stay Healthy

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

August 10, 2020

Tech Letter

Mad Hedge Technology Letter
August 10, 2020
Fiat Lux

Featured Trade:

(SCRAPING THE BOTTOM OF THE TECH BARREL WITH UBER)
(UBER), (LYFT), (FB), (AMZN), (GOOGL), (NFLX), (AAPL), (MSFT)

Scraping the Bottom of the Tech Barrel with Uber

Tech Letter

The coronavirus and the resulting effects from it have had the single most sway on tech companies since the 2001 tech bust.

Marginal tech companies or even quasi-fraudulent ones have been exposed for what they are, while the secondary effects from the virus have supercharged the behemoths of the industry.

The stock market has no earnings growth in the past 5 years without the earnings from Microsoft (MSFT), Facebook (FB), Apple (AAPL), Google (GOOGL), Amazon (AMZN), and Netflix (NFLX). That means that without the Republican corporate tax cut, there has been negative earnings growth in the past five years.

One of those tech companies at the bottom of the barrel has been chauffeur service company Uber (UBER) and their latest earnings report is a glaring indictment of a shoddy business model that operates in a gray area.

The only reason this stock is at $33 is because of the piles of easy money printed by the central bank.

Uber needs all the help they can get, and shares are still trading 20% below the IPO price.

Competitor chauffeur service Lyft (LYFT) is doing even worse registering a 50% decline since the IPO.

Let’s do a little snooping around to see why these companies are doing so poorly and why you shouldn’t even think about investing in these companies long-term.

No matter how you dice it up, Uber’s core business, the one where they refuse to properly compensate their drivers, had a disaster of a quarter with gross ride volumes down 73% year-over-year.

Before we go any further with this one, I would like to point out yes, other areas of the business grew substantially, the problem is that the “other” part of the business is only 30% of total revenue.

Therefore, when 70% of your business that relies on pure volume to scale out crashes by 73%, it doesn’t really matter what else is in the report.

The only sensible idea now is capturing a snapshot of the silver linings, of which there were a few.

Delivery volumes through Uber Eats were up 49%, but the problem here is that first, it’s not profitable per delivery and second, it’s still a small part of the business.

Uber acquired Postmates who is another loss-making delivery service and the idea behind this is to achieve significant cost savings by scaling out these powerful assets.

The problem here is that it is essentially throwing good money on top of bad money because it’s proven that deliveries don’t make money per ride and that won’t change in the near future.

CEO of Uber Dara Khosrowshahi is on record saying Uber will become “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”

This is almost like saying we won’t lose as much money as before and ironically, Dara Khosrowshahi has withdrawn this statement as the ride-sharing model has been repudiated by the consumer during the coronavirus.

Nowhere in the earnings report is the explanation of how Dara Khosrowshahi plans to attract people to share a car ride with a stranger during a global pandemic.

He didn’t share a solution because there isn’t one, hence the 73% decline in ride volumes.

If we assume this company is semi-fraudulent, then the silver lining would be that ride volumes didn’t decline by 100%.

That is where we are now with U.S. corporate companies such as the airlines that fired their employees but have subsidized them to stick around even though there is no work.

Instead of re-imagining itself through bankruptcies, the Fed has encouraged many marginal companies by breathing life into their finances through cheap loans.

This gives failing firms a last chance to enrich management with the capital and “cash out” before they hand the business off to someone who will essentially plan to do the same.

I will say that traders might have a trade or two in this one, because it’s hard to imagine Uber posting another 73% loss in ride volume and a dead cat bounce trade could be in the cards.

Long term investors should steer clear of this one and allow Uber to struggle on its own and just maybe in 5 or 10 years, it might just be “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”

With so many high-quality tech companies and even one that is about to add super growth elements like TikTok into its portfolio, there are so many superior names to deploy capital in the tech ecosphere.

Either you must be galvanized by a gambler’s mentality to invest in Uber, or losing money is something that is habitual in your routine.

uber

August 5, 2020

Tech Letter

Mad Hedge Technology Letter
August 5, 2020
Fiat Lux

Featured Trade:

(MICROSOFT GOES FROM STRENGTH TO STRENGTH)
(MSFT), (GOOGL), (FB), (AMZN)

Microsoft Goes from Strength to Strength

Tech Letter

Microsoft (MSFT) is on the cusp of becoming the best tech company in America and that is the reward they get for staying out of the data privacy quagmire that the other tech titans find themselves in.

A TikTok acquisition would offer a major platform to rival Facebook and Google-owned YouTube and will revamp its image with young people.

TikTok itself will grow into a $300 billion company in the next 5-7 years just by itself.

This purchase is a massive blow to Facebook (FB) and Google’s (GOOGL) prospects as their once-fortified duopoly morphs into a 4-way race between Microsoft, Amazon (AMZN), Google, and Facebook (FB).

This would make up for all the prior missteps with Nokia’s handset business and Skype.

This could be described as the "crown jewel" snapped up at a discount.

This is essentially an asset with 100 million users, massive momentum, engagement, advertising revenue, and something they could cross-sell into the broader Microsoft base.

The treasure trove of data is what makes this deal a can’t-miss proposition.

Think about Microsoft in building software and hardware projects, and not just Xbox. For the first time, it would have proprietary data on a level that they can understand consumer behavior and not just with their enterprise customers.

Data privacy is Microsoft’s biggest selling point to the Trump administration which is concerned about TikTok’s ties to the Chinese government.

TikTok, which is currently owned by a Chinese company, has come under scrutiny and investigation in the U.S. over allegations it is supplying user data to Beijing, a charge that company officials have denied, but have no way to prove that they don’t bend to the whims of the Chinese Communist Party.

This episode follows on the heels of the U.S. effectively banning Chinese telecom giant Huawei in the U.S.

TikTok represents the dual threat of destroying America's edge in technological dominance.

TikTok has become the fastest-growth social platform in history and its inception as a Chinese technology threatens the U.S. reputation.

What specific data is TikTok able to aggregate from U.S. users?

Personal location, app usage, behavioral trends, thematic trends, and economic indicators.

This personal data could be used to take advantage of the American population through military or economic means.

India was first to ban TikTok and didn’t allow a sale of the Indian data to a local firm. They didn’t want money flowing back into Chinese hands.

China is notorious for the mishandling of data and most of the data is resold infinitely inside of mainland China.

How will Microsoft earn dollars from TikTok?

Digital ads.

TikTok would boost Microsoft’s share of the U.S. digital display ad market.

This year, eMarketer predicts Microsoft to hold just 1.5% of that market, slightly ahead of Snapchat but well behind Facebook’s 42% and Google’s 10.4%.

That is about to change.

Just how popular is TikTok?

TikTok is a disruptive force in social media and video.

In the second quarter, TikTok had 30% penetration of U.S. respondents 18 and older in a survey of 2,500 U.S. consumers.

Among respondents 18 to 24, TikTok's popularity is even greater, at about 42%, versus 65% for Facebook, 78% for Instagram and 63% for Snapchat.

Along with this, Microsoft finally gets the “cool factor” they have been missing for generations.

What are the chances of Microsoft buying TikTok?

I would put it at 85%-90%.

ByteDance needs to seal a deal or they leave the table with zilch and at the same time kicked out of America.

The company, a massive social media player in China, is valued at about $100 billion, half of which is due to TikTok.

The deadline gives Microsoft the added effect of increased negotiating leverage and it will be interesting to see what concessions they get from TikTok.

No other major tech company has been given the green light to make the deal and Microsoft has plenty of cash available to make this deal happen.

The deal could be especially beneficial for Microsoft because the TikTok business in the U.S. is valued in the $40-billion range but could eventually reach $300 billion if they nurture it properly.

I would be shocked if Microsoft flubs this golden opportunity to add a trophy asset to put in their trophy cabinet.

CEO Satya Nadella is too shrewd to let this once-in-a-lifetime chance to cement Microsoft as the top dog go to waste.

I was highly bullish on Microsoft before this news, and I can easily say now that this is not only the best American tech company but the best company overall in the world.

July 31, 2020

Tech Letter

Mad Hedge Technology Letter
July 31, 2020
Fiat Lux

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