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Will Amazon Eat Google's Lunch?

And then there were three.

That's right, Amazon (AMZN) will join Facebook (FB) and Alphabet (GOOGL) as the last member of the triumvirate dominating the global digital ad industry.

That is what all signs are pointing to.

In a survey conducted by PricewaterhouseCoopers (PwC), the global digital ad industry increased by 21% YOY to $88 billion in 2017.

Of that growth, Facebook and Alphabet commanded 90% of it.

Mobile ad growth exploded last year because of the migration to smartphones increasing by 36.2% YOY in 2017.

Mobile ad revenue accounted for 56.7% of the digital ad dollars.

Search ad growth decelerated from 48% to 46% market share, but overall revenue climbed 18% to $40.6 billion reflecting the preference for older generations to use desktop search as their go-to platform.

Younger generations prefer dynamic video advertising, which suits mobile devices and tablets.

This segment grew 33% to $11.9 billion and is set to eat into search ad market share going forward.

This all bodes well for Amazon, which can take advantage of these various channels to pump through more ads that companies are clamoring to buy on Amazon's e-commerce platform.

Video ads would be ripe for Amazon Prime Video too, Amazon's on-demand media content service.

By 2021, Amazon's digital ad profits will eclipse its cloud profits solidifying Amazon as the best American tech company because of its multitude of premium profit drivers.

As time goes by, the quality of Amazon's company ascends with no restraints.

The Mad Hedge Technology Letter rates Amazon as the best publicly traded tech stock and that will not change anytime soon.

Amazon's digital ad revenue shot up 129% YOY to $2.2 billion.

This growth rate would make any investor drool.

Amazon might want to shift this business over from the "other" line item on its earnings report because it is blossoming into a main engine of growth and profit.

As Facebook and Alphabet have demonstrated, the digital ad game is a high profit, zero sum game, and Amazon is in perfect position to capitalize going forward.

Amazon's e-commerce business is the foolproof platform that can attract digital ad dollars in droves.

Not only are customers already buying products on Amazon.com, but they are usually purchasing numerous items highlighting the suitability of Amazon populating relevant ads to its customers.

Amazon's strategy to sell high-volume, good value for money products fits nicely into the digital ad strategy with plenty of opportunity for ad buyers to roll out ad campaigns to the masses.

Amazon continues to augment its digital ad tech team creating new tools and has now started directly approaching brands directly racking up digital ad sales.

Amazon's gain is Facebook and Alphabet's loss.

If Amazon goes full steam into the ad tech game, it could do what it has done to brick-and-mortar retail - deflate prices.

This is a worrying sign for Facebook, which is already on the ropes after realizing its business model has some major holes.

Alphabet's strategic position is superior to Facebook's, but it is very much still a one-trick ad tech pony.

The attempt to reintegrate a censored version of its Google search into China makes sense when other FANGs are coming for their lunch stateside.

This epitomizes the current tech climate - evolve now or die.

Amazon is working on a new video ad product that it will place in its search results.

This new product is currently in beta testing mode.

These video ads will be 90 seconds or less and will direct customers to a custom landing page or directly to an official website where they can purchase the item.

The video ad will only be shown for users of iPhones and iPads initially.

Amazon is requiring companies to pay a minimum of $35,000 for this new type of ad campaign. Some of its prominent ad buyers such as Procter and Gamble are already testing out this service to curate the perfect video ads to place inside Amazon search.

At first, the inventory for these video ads will be restricted.

Amazon Media Group is the in-house sales team responsible for selling these new products.

For example, in Germany, the habitual Amazon customer carries out a systematic routine to buy Amazon products.

First, customers will perform astute research on potential products and analyze different price points to gain a comprehensive picture of the market using their smartphone.

The customer later adds the desired items into the shopping cart.

At a later date, the customer purchases the item on a different device, and in many instances, mobile is used just to research products when the customer is out and about.

This multi-leg buying process gives Amazon multiple chances where it can fit in some video ads for the customers.

It is true that the minimum $35,000 will make it harder for small businesses to compete, but this is tailor-made for larger companies to offer a compelling case to customers while leveraging their brand awareness.

It is entirely possible that Amazon will surpass $8 billion in digital ad revenue in 2018 and then blow by $16 billion by 2020.

Of that $16 billion in revenue, $12 billion could be booked as operating profit showing off the juicy margins that make this industry so attractive for the neutral observer.

Yes, Amazon has the largest and best product search engine in the world, and it's time to start leveraging this asset to drive monetization growth.

Specifically, the ability for customers to click on an ad and be shuttled over to Amazon.com for final purchase.

This is the x-factor missing out on Facebook and Google search models.

Amazon has the capability to cherry-pick revenue from each part of the process up until the delivery to the door.

This opens a slew of extra revenue down the road as it enhances the shopping experience because Amazon has full control over the whole process.

This runs parallel with Amazon changing how its ad tech operates to accommodate the emphasis on generating huge growth numbers in ad volume and sales.

Small ad buyers usually work through an agency to integrate with Amazon while larger ad buyers work with Amazon's in-house team.

In the next few weeks, sponsored websites outside of Amazon's ecosystem will start advertising to shoppers who are able to click a link directly moving the buyer back to Amazon.com.

The sponsored ad route is a direct shot at Google search and Facebook.

Unsurprisingly, Amazon converts sales at a 350% higher rate than Google, underscoring the effectiveness of digital ads for Amazon.

When customers are already on the Internet to shop, shoppers could do a lot worse than clicking on a direct link funneling them to Amazon.com.

Posting baby photos on Facebook is not likely to convert users into product buyers.

Neither is checking your Gmail account, translating foreign language on Google Translate, or using Google Search to populate results usually not related to shopping.

These methods fail to convert an Internet surfer to product buyers to the detriment of Facebook and Google search.

Amazon has the perfect business model for selling digital ads.

This robust ad business will spur Amazon shares more than $2,000, and the quality of the sum of the parts keeps rising.

Execution is the only roadblock. And as most of us know, Amazon is one of the most innovative and cleanly executed companies in the world with visionary strategists.

That is why it is Amazon.

________________________________________________________________________________________________

Quote of the Day

"What's dangerous is not to evolve." - said Amazon founder and CEO Jeff Bezos.

August 15, 2018

Tech Letter

Mad Hedge Technology Letter
August 15, 2018
Fiat Lux

Featured Trade:
(HOW TO PLAY THE NEW FORTNITE GAMING FAD),
(ATVI), (EA), (AMD), (NVDA), (MSFT), (AAPL), (GOOGL), (TWTR), (SNAP), (FB), (SPOT), (GAMR)

How to Play the New Fortnite Gaming Fad

Tech Letter

Each generation grows up in its own unique environment.

Childhood experiences differ more and more as the world rapidly changes because of hyper-accelerating technology.

Millennials are usually defined as children born between 1981 to 1996.

They were the last generation to grow up outside breathing crisp, fresh air and meandering around the neighborhood with their friends looking for excitement.

Generation Z is the first generation in America generally raised indoors because of their overwhelming preference and broad-based addiction to technology.

Social media stocks have been a huge winner from this new paradigm shift in the behavior of young adults.

Instead of running around the block in packs, children are laser focused on these platforms communicating with the entire world and propping up their social lives.

Children meet a lot less than they used to and convening on a social media platform of choice has become the new normal.

Platforms such as Twitter (TWTR), Instagram and Snapchat (SNAP) have convincingly won over these new eyeballs even so much so that the new "going out" is congregating on Snapchat with a group of friends.

Facebook (FB) is now considered a legacy social media platform full of millennials and the older crowd.

Generation Z do not fancy drugs or drinking like the youth before them, rather, their panacea is video games and a lot of them.

These new societal trends will hugely affect your portfolio going forward.

A battle royal game is a video game category mixing the survival, exploration and scavenging elements together with last-man-standing gameplay.

These types of games predominantly contain 100 players sharing the same experience on a broadband connection.

This genre has been all the rage with PlayerUnknown's Battlegrounds (PUBG) piling up 400 million gamers across the globe selling 50 million copies of the game.

Of the 400 million gamers, 88% access the game via mobile devices highlighting the vigorous shift to mobile for younger generations.

PUBG made more than $700 million in sales in 2017.

The rise of the billion-dollar video games is alive and well.

In fact, Activision Blizzard (ATVI) stakes claim to eight gaming franchises commanding more than $1 billion in annual revenue with titles such as Overwatch, Candy Crush, and Call of Duty.

The popularity of video games will drive GPU manufacturers Nvidia (NVDA) and AMD (AMD) to new heights because gamers require high-quality GPUs to effectively game.

Nvidia CEO Jensen Huang even spouted that "the success of Fortnite and PUBG are just beyond comprehension" boosting GPU sales and capturing the imagination of global youth.

Fortnite, a "Hunger Games" style battle royal video game mirroring PUBG, has taken the world by storm in 2018.

This cultural juggernaut surpassed the 125 million gamer mark in just one year.

In February 2018, Epic Games, the maker of Fortnite, earned $126 million in one month, and it was the first time it passed PUBG in monthly sales.

In April 2018, it followed up monster February numbers by pulling in $296 million.

The growth trajectory is parabolic. Hold onto your hats.

Fortnite sparkles in the sunlight because its free-to-play model does not exclude anyone and is available on all devices.

At first, Fortnite was available for iOS customers and Samsung Android holders because it inked an exclusive deal with Samsung.

This week is the first week Epic Games is rolling out Fortnite to non-Samsung Android users with an interesting caveat.

The Android version of Fortnite bypasses Google Play (Google's app store on Android) preferring to sell the game direct for download from its official website.

This highlights that content is truly king.

Epic Games is betting the surge in popularity for its juggernaut game will sell itself.

This decision will cost Alphabet (GOOGL) $70 million per year in commission.

Apple makes it mandatory that any app downloaded to its devices must be downloaded from Apple's app store.

However, Android doesn't have the same requirements as its system is more functional, open, and a developer's dream.

Simply put, there are ways to download the game on Android without ever touching Google Play.

Going forward this could have a similar effect Spotify (SPOT) had on Wall Street on its IPO.

The middlemen or broker app could get bypassed in favor of direct sales.

Apple pockets commission on 30% of all in-app spending raking in around $60 million from Fortnite.

In-game add-on revenue is how Fortnite makes money from this free-to-play game.

The bulk of spending comes in the form of costumes better known as skins, where players pay to dress up their character in various garments selected for purchase.

The other revenue stream is a season subscription on sale for $10.

The tech sector has been migrating to subscription-based offerings and video games are no different.

This could play havoc with Alphabet's Google Play and Apple's app store down the line if prominent content producers choose to bypass their stores to sell directly.

The lack of video game exposure to the FANG group is mind-boggling. It seems they have their finger on the pulse of every other major trend in technology but have missed out on this one.

Microsoft (MSFT) is the closest FANG-like stock deep inside the video game ecosphere by way of its famous console Xbox.

In fact, Microsoft earns more than $10 billion per year from its gaming segment surpassing Nintendo at $9.7 billion per year.

This doesn't eclipse Sony's gaming revenue, which is $17 billion per year, but the 36% YOY growth in Xbox-related revenue signals its intent in the gaming industry that plays second fiddle to its cloud and software businesses.

Gaming is just a side business for Microsoft right now.

Ironically, Tencent has a 40% stake in Epic Games and is patiently waiting for government approval to sell Fortnite in China, which could be painstakingly arduous.

If Tencent gets the green light, Fortnite could develop into a monster business in 2018, and this is just the beginning.

Regrettably, Tencent has been mired in regulatory issues with the communist government reluctant to approve selling in-game products, which usually make up the bulk of revenue.

Recent blockbuster hit "Monster Hunter: World" was blocked by censors after debuting to great fanfare on August 8, 2018.

This title was expected to be one of the most popular video games of 2018.

Chinese state censors are on a short-term crusade to block the video game industry from receiving critical licenses and is the main reason for Tencent shares' headwinds.

Tencent shares peaked in January and are down almost 15% in 2018 because of uncertain gaming revenues.

Investors need to wake up and understand the gaming industry is about to mushroom because of demographics and the migration away from outdoor activity.

Following generations will have an even stronger bias toward technology-based indoor entertainment.

We are entering into the unknown of $4 billion per year video game businesses based on just one title and not one company.

Fortnite made PUBG's $700 million in revenue last year look paltry.

Gamers will soon see the rise of a $5 billion game franchise in 2019 and the sky is the limit.

This industry has growth, growth, and more growth and these single titles could surpass revenue of large semiconductor or hardware companies.

Don't underestimate the power of your child gaming away in your basement, he or she is part and parcel of a wicked tech growth driver about which not many people know.

Unfortunately, Epic Games is not a public company and shares cannot be purchased, but the success of Fortnite means that investors must pay heed to these new developments.

I am highly bullish on the video game sector and a big proponent of Activision (ATVI). A secondary name would be EA Sports (EA), which curates the Madden and FIFA franchises.

ATVI has felt the Fortnite effect in its share price selling off 11% because of investors' nervousness of Fortnite siphoning off ATVI gamers.

This short-term drop is a nice entry point into a solid video gaming company with various successful franchises that have withstood the test of time.

The 200-day moving average has provided ironclad support on the way up, and the Fortnite phenomenon won't last forever.

I would avoid the video game ETF ticker symbol GAMR because it includes one of my bona fide shorts - GameStop (GME).

It's mainly comprised of American, Japanese, and a Korean name but it would be sensible to focus on the companies with the highest quality comprehensive content.

The ETFs recent drop is also due to the strength of Fortnite.

________________________________________________________________________________________________

Quote of the Day

"Companies in every industry need to assume that a software revolution is coming." - said Silicon Valley venture capitalist Marc Andreessen.

August 9, 2018

Tech Letter

Mad Hedge Technology Letter
August 9, 2018
Fiat Lux

Featured Trade:
(WHY SNAPCHAT IS GOING DOWN THE SOCIAL MEDIA DRAIN),
(SNAP), (FB), (NFLX), (AMZN), (GOOGL), (TWTR), (BB)

Why Snapchat is Going Down the Social Media Drain

Tech Letter

Companies this small should be growing.

Growth companies and tech go hand in hand, especially at the incubation stage where there is little resistance hindering growth.

The law of numbers dictate that small companies only need marginal gains to generate high growth in terms of percentages.

Once a company becomes as big as Amazon (AMZN), it becomes harder to move the needle.

Snapchat (SNAP), which is in the same social media game as Facebook, is vastly smaller than the incumbent that hoovers up the digital ad dollars.

Facebook (FB) boasts 1.47 billion daily active users (DAU) and is one of the members of a powerful digital ad duopoly along with Alphabet.

Snapchat added 4 million net (DAU)s in Q1 2018 and blew its chance for sequentially increasing usership by losing 4 million (DAU)s last quarter.

The stock sold off hard in after-hours trading, down 11% at one point but rebounded big time with the earnings commentary with Snapchat revealing guidance for the first time.

Snap opened the next trading day demonstrably lower reflecting the disenchantment of investors.

Evan Spiegel's creation has really had a hard go of it lately. The app redesign was a cataclysmic failure of epic proportions denting the popularity of this app.

The fallout was sacking 100 engineers.

Overall, there were some positive takeaways from the earnings report, mainly, the revenue beat was satisfying, and profitability shone through with average revenue per user (ARPU) shooting up 34% YOY.

Another victory was the boost in ad revenue, up 48% YOY, which is the main driver of revenue in the company.

The hairiest issue with this company is the fundamentals are excruciatingly apathetic.

Stagnating usership growth at this stage is a red flag.

Social media stocks were bashed in recent trading sessions with Twitter (TWTR) dropping from $46 to $31 because of diminishing usership and soft guidance.

The amount of monthly active users dropped from 338.5 million to 335 million, and financial guidance was brought down a few notches.

Twitter has made a poignant attempt to clean up its system from the debris molding around the edges.

To "improve the health" of the Twitter platform, Twitter purged 6% of all accounts rooting out the influences undesirable to its ethos.

Social media companies must take the initiative to protect its platforms, instead of being a silent bystander to a stabbing in a dark alley.

Facebook was the mother of all drops in the social media space collapsing from an all-time high of $218 to $171, a drop in one trading day.

Guidance tore apart this stock after a rapid run-up to the earnings report that saw unbelievable strength rising almost every day.

Poor guidance reflects the ill-effects of the recently enacted General Data Protection Regulation (GDPR), which tainted the European numbers.

The epicenter of data regulation has crimped profitability and popularity of social media in the Eurozone.

If Facebook and Twitter are facing tough short-term headwinds, then imagine how Snap feels.

They are the small fish in the big pond, and they are running out of places to hide.

Every new user Instagram picks up is one less potential user missed for Snapchat.

Let me remind you that Instagram is boosting its monthly average usership (MAU) 5% per year.

Instagram recently surpassed the 1 billion (MAU) mark after eclipsing the 800 million mark in September 2017.

Instagram added 200 million users, more than the entire (DAU) for Snap, in 11 months.

Big trouble for Snap.

Effectively, Snap is the inferior version of Instagram for young kids and that narrative does not bode well for the future.

For every $1 Snapchat spends, it earns -$6 on that $1. Kids aren't the biggest distributors of wealth. It would help if Snap matured its interface to accommodate older millennials who are tech savvy to boost its average revenue per user.

As it stands, Facebook earns $9 per daily active user while Snapchat earns a smidgeon over $1 per daily active user.

I cannot say that Facebook is a quality platform, but it has successfully monetized the platform.

What's more, CEO Evan Spiegel blamed the drop in usership on the redesign.

Yes, the redesign didn't help, but the usership would have dropped anyway because of draconian data laws in Europe and the general malaise stigmatized toward current social media platforms.

Management is not executing effectively at Snap, and it is out of touch with its core base without opening up new sources of growth.

If a company redesigns an app, enhance the app, do not make it unusable such as the Snap redesign.

Snap's eggs are all in one basket. And that basket is shrinking in the high revenue locations of North America and Europe.

It only earned $2 million from non-digital ad revenue.

As FANGs power on to pass a trillion dollars of market cap, the diversity in their segments are nothing short of impressive.

Snap has no other irons in the fire and is overly reliant in an industry in which it will slowly bleed to death.

The only savior is in reinventing itself, but that takes guts and a bold CEO with a revolutionary strategy.

There is precedence for this transformation such as BlackBerry (BB), one of the original smartphone makers, which has morphed into an autonomous driving technology company.

Another good example is Netflix, which started out in the DVD industry and pivoted to online streaming.

What Snap is doing has its limits and it needs to shake up its business model or slowly rot.

The company must wake up to the stark realization that its platform is not engaging.

Many analysts believed Snap could become half as big as Facebook and that seems highly unlikely.

I have been bearish on Snap for the entire existence of the Mad Hedge Technology Letter.

And it has been the perfect sell on the rallies stock because of its poor performance, even poorer management, and awful fundamentals.

A telltale sign was the last earnings call.

It was the second quarter in a row of blaming the redesign on bad performance.

If Spiegel underperforms next quarter again - meaning negative growth usership - it will be interesting if he blames the redesign again.

Third times a charm.

Where does this all lead?

Facebook offered to purchase Snapchat after its IPO because management was worried it would steal market share from Instagram.

Snapchat rebuffed the advances and decided to lock horns directly with Instagram.

Well, the David and Goliath battle is playing as most would assume, boding ill for the fate of Snapchat.

Instagram will keep weakening Snapchat moving forward. And Facebook might end up scooping up Snapchat down the road for a discount.

It doesn't look good for Snapchat, and investors should consider shorting this stock after a dead cat bounce.

________________________________________________________________________________________________

Quote of the Day

"The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model and it might not be successful," - said former Apple cofounder Steve Jobs in a Rolling Stone interview, 2003.

August 7, 2018

Tech Letter

Mad Hedge Technology Letter
August 7, 2018
Fiat Lux

Featured Trade:
(WHAT TO DO ABOUT TECH NOW),
(AAPL), (FB), (NFLX), (AMZN), (GOOGL), (AMD), (MSFT)

What to Do About Tech Now?

Tech Letter

Is it time to dump tech?

Short term, yes - long term, no.

Recently, a series of big tech earnings misses throttled the market tearing into the positive investor sentiment, which was holding up nicely after the early year sell-offs.

Every precipitous and steep drop this year has followed with a mammoth dip buying spree lifting stocks to newer highs.

This is the type of robustness investors rejoice in when talking about the price action of technology stocks.

Not only is the dip buying awe-inspiring, but the lack of hesitation in the dip buying is even more impressive.

Investors have scant time to pick up these precious names before the entry points disappear like an invisibility cloak.

Ditch these stocks at your peril, because the buying queue represents the likes of all the tech behemoths waiting to buy back their own stock, namely Warren Buffett, and the flight to quality brigade that view big cap stocks as a de-facto cash sanctuary.

The anxiety was palpable when Netflix's (NFLX) management badly miscalculated new subscription business after a brilliant earnings report from Microsoft.

Investors got another wrench in their stomach when Facebook (FB) followed Netflix with dismal guidance ripping apart the growth narrative and pivoting toward ameliorating its controversial business model giving investors a fresh dose of uncertainty.

All eyes were planted on Alphabet (GOOGL), Amazon (AMZN), and Apple to provide some calm to the markets.

That's exactly what they did.

Part of the problem now is that expectations are so exaggerated, these companies have little wiggle room to overdeliver.

Industry specialists largely believe tech profits to rise 20.9% YOY this earnings season. The lion's share of the growth has been contained to the headliner names such as Amazon, which has grown like no company has ever grown before.

Estimates show a slide in YOY tech profits for the third-quarter earnings decelerating down to less than 15%. While still good, it's not the 20% growth YOY, and over that it has been fueling tech's rise in increasingly precarious market conditions.

The downshift in profit growth has been anticipated for the past few quarters, as investors thought a trip wire would at some point bring down the entire FANG group.

What we have found out is that not all FANGs are created equal. Some are more equal than others.

The past earnings performance indicated this with Amazon's emphatic top-line growth numbers blowing away the most adamant bear.

Netflix's narrative is still intact, and consolidation is badly needed for a stock that has gone parabolic in 2018.

The short-term capitulation of Facebook and Netflix is proof that large cap tech also has downside risk embedded in its model.

It was starting to seem like down days were never in the cards.

Lowered tech guidance for next quarter will really test the market's resiliency during next earnings season.

If these numbers miss spectacularly, expect the tech sector to give back a good chunk of the year's gains back.

Decelerating profits is never a positive sign. However, after coming from Mt. Everest profit levels, will the markets brush it off and power higher?

There is a lot more juice left in this tech story, and sharp corrections should still be bought.

Tech is becoming quite frothy at these levels and choosing the right tech story will go a long way to sleeping well at night.

It will be excruciatingly difficult for tech companies to impressively beat on the upside next quarter.

However, the secular story and unique earnings growth are treasures compared to other sectors that are getting beaten into submission.

When you delve into the numbers, the success becomes comical.

Apple is the first company to cross the $1 trillion of market cap.

This company prints money to the tune of $11 billion in profits each quarter.

It possesses a devoted userbase, surging software and services segment, and premium grade smartphones allowing Apple to cash in profits to the extent they do.

CEO Tim Cook sent an email to Apple's employees downplaying the milestone, instead saying "financial returns are simply the result of Apple's innovation."

He is completely correct.

The innovation has fed back through spiking profits and boosting sales allowing Apple to make money hand over fist.

This in turn is a big reason why Apple's share price has almost quadrupled with Cook at the helm.

The best and brightest tech companies in 2018 share one unified trait: innovation.

And it is not a surprise that Amazon and Microsoft (MSFT) will be next to join the trillion-dollar club as they boast some of the most innovative staff in the world.

As these two companies pass the trillion-dollar market cap, it will encourage the next tier of flourishing tech companies to make the jump to the trillion-dollar club.

The tech sector is still eating everybody's lunch with every business in the world migrating to their front yard.

Some weakness in the extended tech shares have been a matter of when and not if.

Advanced Micro Devices, Inc. (AMD) is a stock gaining 22.8% just in the month of July underlining the overheated price action of some of these tech names.

I am largely staying away from chip stocks now because trade tensions have bred uncertainty around Chinese chip revenues.

The tech sector has many moving parts and a trade war can hurt one part of tech while others remain unblemished.

Another front of concern is data regulation headlines rearing their ugly heads from time to time.

There are more hurdles for tech stocks going forward, but that does not mean they will get tripped up.

I am in a tech holding pattern until I find an opening to issue my next slew of tech trade alerts.

Year Over Year Profit Growth

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Quote of the Day

"I will always choose a lazy person to do a difficult job because a lazy person will find an easy way to do it." - said founder of Microsoft Corporation Bill Gates.

August 6, 2018

Diary, Newsletter

Global Market Comments
August 6, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or FINDING A NEW GIG),
(FB), (TWTR), (INTC), (NFLX), (AAPL), (AMZN),
(RIGHTSIZING YOUR TRADING)

The Market Outlook for the Week Ahead, or Finding a New Gig

Diary, Newsletter, Research

I'm back! Yes, I have freshly debarked from the KLM 10-hour nonstop from Amsterdam, with little gin bottles in the shape of old Dutch houses in my pockets.

And what do I do upon landing but rush to pound out another newsletter, digesting what I learned from reading a mountain of research on the way home.

Oops! It looks like I forgot how to type!

My 24-hour layover there enabled me to view the great Rembrandt masterpieces at the Rijksmuseum and explore Anne Frank's house, now part of a large museum complex. When I visited there 50 years ago you could just walk right in the front door, as there was almost no one there.

It was not a bad summer as far as losses go; a charger left behind on the Queen Mary, a hair brush in Paris, and all of my money in Zermatt, Switzerland. That last item was the result of my daughter breaking an ankle while riding a scooter down the Matterhorn.

If you are going to break something make sure you do it in Switzerland. The X-rays, MRI scans, doctors, and cast cost me only $1,000. The same would have cost me $10,000 in the U.S. But the wheelchair set me back $650. A better one could be had at home from Amazon for $115.

Still, there is no better way to breeze through customs and immigration but in a wheelchair. We avoided the long lines and saved so much time that my other daughter promised to break her ankle next year to achieve the same shortcuts.

Arriving at home in San Francisco it immediately became clear that a lot of chart formations are busted as well, especially those for Facebook (FB), Twitter (TWTR), Intel (INTC), and Netflix (NFLX). Apple (AAPL) is bumping up against my 2018 target of $220, while Amazon nearly hit my $2,000 goal.

With tech likely resting until the NEXT round of 25% earnings growth that starts in two months, we are going to have to find a new gig to earn our crust of bread. That will most likely be small caps, value plays, and multiyear laggards. Last year's big August play was in steel, gold, industrials, and commodities, which are all now getting hammered by trade wars.

Even if I had stayed at home in July trading like a one-armed paperhanger I'm not sure I would have made any money. Tech melted up, then melted down, and as we all know from hard-earned experience, the losses always cost more than the gains.

The week went out with a July Nonfarm Payroll Report that was tepid at best at 157,000. But headline unemployment stayed at 3.9%, a 17-year low. With the fifth week of gains and the (SPY) now up 6.2% in 2018 it appears that the markets only want to hear good news...for now.

Professional and Business Services were up 51,000, Manufacturing gained 37,000, while Hospitality and Leisure picked up 40,000 jobs. The bankruptcy of Toys "R" Us seems to have cost the economy 32,000 jobs. The broader U-6 "discouraged worker" unemployment rate fell to 7.5%.

Now is the golden age of the working high school dropout, the criminal background, and the DUI conviction. Many companies would rather hire former junkies that pay up for expensive college grads, which is why wage gains are still going nowhere, and perhaps, never will. Expensive retiring baby boomers replaced by cheap minimum-wage millennials is also a drag on wages.

Deflation isn't just hitting wages. It is destroying the financial industry as well, as high-paid yuppies are replaced by robots. This is the first bull market in history with no net hiring by Wall Street.

Wells Fargo no longer actually manages money, although it will readily accept your money to do so and farm it out to bots. Fidelity launched the world's first zero fee index fund, the Fidelity ZERO Total Market Index Fund (FZROX). As interest rates are now providing new income sources for managers, expect negative fee funds to come soon.

Markets are certainly climbing a wall of worry, a Great Wall. The Chinese are matching our threatened 25% tariffs on an additional $200 billion of trade with $60 billion of their own. After that retaliation will have to take indirect forms, as they have run out of tats to match our tits (oops, doesn't really work, does it?).

They might shut down the massive General Motors (GM) plants in China, where they sell more cars than in the U.S., and a LOT more Buicks. They could also interfere with the Apple assembly line. Remember, trade wars are only easy to win when you run a dictatorship. They could also continue weakening the yuan to offset the tariffs, as they have done so far. We can't retaliate there with a rising interest rate regime.

Speaking of rates, you can bet your bottom dollar that the Fed will raise them another 25 basis points to a 2.0% to 2.25% range at their upcoming September 25-26 meeting, after having passed last week. A market killing inverted yield curve is now only months away. Rising rates don't matter until they do, and then they matter A LOT!

Also, of concern is the appreciating levels of the Mad Hedge Market Timing Index, which at a nosebleed 71 is approaching seven-month highs. Buying up here never offers a good risk/reward ratio.

As I have been climbing in the Alps and out of the markets my 2018 year-to-date performance remains unchanged at an eye-popping 24.82% and my 8 1/2-year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.

This coming week will be a very boring week on the data front, which is usual after the big jobs reports of the previous week..

On Monday, August 6, there will be nothing of note to report.

On Tuesday, August 7 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.

On Wednesday, August 8 at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST the Fed is expected to raise interest rates by 25 basis points. At 2:30 PM Fed governor Jerome Powell holds a press conference.

Thursday, August 9, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.

On Friday, August 10 at 9:15 AM EST, we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, I'll be recovering from jet lag and getting back into my groove. I'll send you a Trade Alert as soon as I find a good entry point. The year-end sprint is now on.

Below look at the gigantic smoke plume rising to 40,000 feet from the massive California fires that I flew past on the way home.

Good luck and good trading.