Posts

July 16, 2019

Global Market Comments
July 16, 2019
Fiat Lux

Featured Trade:

(THE BIGGEST TELL IN THE MARKET RIGHT NOW),
(GOOGL), (FRC), (PINS), (WORK), (UBER),
 (ADSK), (WDAY), (SNE), (NVDA), (MSFT),
(POPULATION BOMB ECHOES),
(CORN), (WEAT), (SOYB), (DBA), (MOS)

June 11, 2019

Mad Hedge Technology Letter
June 11, 2019
Fiat Lux

Featured Trade:

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

Big Tech's Feeding Frenzy

The start of the cloud consolidation is upon us.

The cloud kings, in order to stay ahead of the competition, are resorting to acquiring growth through M&A.

We are still in the sweet part of the growth phase with companies showing they can pull off a mid-20% annual growth rate.

Salesforce (CRM), the leader in client relationships management platforms, took this cue to add to its army of software cloud options by snapping up Tableau (DATA).

What does Tableau do?

Tableau software takes the inputs of raw data and transforms it into easily decipherable dashboards and diagrams.

The company has been expanding its product line to include data cleanup and machine learning tools, enabling it to compete in the wider data-warehousing business.

It has more than 86,000 customers, including Verizon Communications Inc. and Netflix (NFLX).

Let me remind you why big data companies are the golden goose of the technology industry and why they are intrinsic to the fortunes of tech companies.

The idea of big data has been around for years; most organizations now are acutely aware that if they capture all the data that flows into their businesses, they can apply data analytics and generate value creation by making the best strategic decisions suggested from the underlying data.

If upper management hasn’t figured this out yet, they are probably out of business by now.

Let’s roll back to the 1950s, decades before anyone coined the term “big data,” businesses were using rudimentary analytics, basically numbers in a spreadsheet that were manually registered, to unearth paradigm shifts and market opportunities in their industry.

The smorgasbord of goodies that big data analytics offer the world is legendary.

Speed and efficiency are at the top of the list.

Whereas a few years ago, collecting vital information that could be used for future decisions took pace much slower than today.

Identifying insights for immediate actionable business implementation is happening in real time now.

This new mode of execution and organization offers firms an outsized competitive edge they could only dream of.

Harnessing data and utilizing it in the best way in order to monetize its business model is now the norm.

The end result is repeatedly higher trending profits and better customer experience.

Companies and its expenses were also reaping the rewards of this new model with major cost reduction.

Big data technologies can expect significant cost advantages when it comes to storing large amounts of data – plus they can identify more efficient ways of doing business.

Companies now have the pulse of the market and demonstrate the ability to gauge customer needs and satisfaction allowing the company to identify new markets.

This, in turn, has firms often migrating into completely different parts of the economy.

Salesforce’s deal with Tableau isn’t the first and won’t be the last cloud deal.

This is just the beginning.

The decision comes after Google (GOOGL) agreed to buy Looker Data Sciences Inc. for $2.6 billion last week, a move to expand Google’s offerings for managing data in the cloud.

I envision Google wading further into the enterprise software waters as they attempt to relieve their reliance on Search as the primary money maker.

Acquiring the best software then spreading its application through its other assets would be a great initiative too.

For example, creating an enterprise service for YouTube channels and charging YouTube creators a fee to operate a cloud-based product that specializes in optimizing their YouTube channel would be a compelling idea.

There are a million different machinations that Google could elect for, and letting the genie out of the bottle in a good way will do wonders.

After all, global spending on technologies and services that enable digital transformation will surpass $2 trillion in 2022 serving up a long and wide runway for companies that can hunker down and carve out premium enterprise software on the cloud.

As for Salesforce, the stock sold off on anxiety that Salesforce is overreaching to add growth.

There is definitely some truth behind this weakness.

Could this be the end for Salesforce’s growth supercycle?

Salesforce is a pure software growth strategy and the stock has gone nowhere trading sideways for the past 6 months.

Make no bones about it, Salesforce absolutely overpaid for Tableau and even announced that its second headquarter will be stationed in Seattle, a stone’s throw from the headquarter of Tableau.

Founder and Co-CEO of Salesforce Marc Benioff is betting the ranch on data analytics and hopes the subsequent synergies will result in cost savings, better cloud products, a resurgence in revenue growth while wielding a first-rate army of software engineers.

As for now, even the tech market is single-handedly propped up by the Fed who have signaled even more dovish monetary policy.

Wait to read the tea leaves on whether these new additions to Salesforce will meaningfully result in growth or not.

For the time being, Salesforce and tech remain in a precarious position whipsawing because of Trump’s high-risk geopolitical strategy and the Fed attempting to cushion any economic blows from an administration hellbent on tariffs.

 

June 10, 2019

Mad Hedge Technology Letter
June 10, 2019
Fiat Lux

Featured Trade:

(WILL REGULATION KILL TECHNOLOGY?)
(FB), (MSFT), (GOOGL)

Will Regulation Kill Technology?

The Technology Hunger Games of 2019 is best viewed through the lens up top - the 30,000-foot view will offer insight into how the cookie will crumble.

Understanding the mechanisms which will either stop the Silicon Valley tech renaissance in its wake or deliver a supercharged boost to this sector is essential to dissecting the U.S. economy moving forward.

Silicon Valley has experienced a sensational generation by any yardstick and sometimes that is lost in the fog of war with the 24-hour news cycle hellbent on stealing the mojo of the tech industry.

Do or die regulation is shaping up to be the most critical acid test in the tech industry since the creation of the internet.

How will big American tech firms adjust to this new normal of government intervention forcing them to meaningfully alter their DNA?

Is a paradigm shift in store for the relationship that is the consumer and a tech company?

The American economy is probably the closest thing that can be passed off as unfettered capitalism.

This type of capitalism is predicated on scarce regulation which is an important part of the underlying theory.

With thin regulation, “animal spirits” can mushroom industries and its underlying companies to superstardom, we have seen this over and over again with companies like Google and Facebook.

On the flip side, we have austerity and economic vigilance. 

Just to take a look around the globe and you will understand what I mean.

Germany is the economic gem of Europe and its namesake union motoring the 28-country block as the mainstay hub of innovation and value creation in the region.

But that does not mean they condone unfettered capitalism.

This is the same government that buttressed the call for austerity for the Greek and Italian government when these two entered uncontrollable debt cycles.

Deutsche Wohnen SE fell 8.7% in Frankfurt, while Vonovia SE dropped 5.5% whom are Germany’s largest residential landlords.

I thought buy to let was a guaranteed cash cow? What happened?

Germany’s largest residential landlords publicly traded shares cratered on the anxiety that Berlin will enact a rent freeze for the next five years in reaction to a surge in rental prices.

Deutsche Wohnen who owns 112,000 units is fighting fiercely to overturn this piece of legislation as they are the main recipient or culprits of the housing renaissance causing residential property opportunities or challenges to explode in the artsy Germany city.

Although residential property income is hardly connected to the fortunes of global technology, the regulation sets the tone for other pieces of the economy as a whole.

Take a quick rundown of other European nation states and the red tape is slapped around in abundance.

The end result is that Europe, even with German ingenuity, has been unable to deliver a tech company that can look the Silicon Valley FANGs in the eye and regulation is a big reason why.

Europe is essentially America with no tech companies because of it.

If you want to shovel through the recycling to pick up a name or two, then Swedish-based Spotify, the music streaming platform, would be apt and on the chips side, ARM Holdings, a British semiconductor company with many of its chips installed inside of Android systems.

These names are few and far between.

ARM Holdings was acquired by Softbank for $23 billion in 2016, a bargain buy at 2019 standards.

While America has privatized away many industries, take a look at other countries like China, who are propping up zombie banks and other state-owned companies accumulating more junk-graded debt.

I would argue that centrally planned economies like China and North Korea possess governments who get in the way of their economy more often than not to maintain strict control over its populace.

This is why private businesses often get the shaft of the top-down way of governing which hurts the free or not so free markets.

The biggest event in tech in the next 2 years will be if the big tech giants break up or not because of anti-trust tinged worries.

Microsoft’s regulatory mess was the last time the American government rolled up their sleeves and intervened this boldly into the tech sector and the functioning of it.

Remember that Microsoft missed search.

They allowed Google and then Facebook to launch and now we are back at the anti-trust table figuring out again if a reset is necessary or not.

This happened to Microsoft because they were scared to go into that part of tech for fear of more anti-trust scrutiny.

If the government does pound Silicon Valley with harsh anti-trust rulings, these big platforms won’t be able to lean on its richer parent companies to bail them out since they will be separate.  

I believe that if Google, Apple, and Amazon are cut apart and set free into the world, it will incite another technological renaissance for another thirty years.

Competition mixed with free markets has a funny way of working itself out.

As I see it, these monstrous platforms are stifling innovation now and choking off smaller companies in the incubation stage that could become the next Google.

Releveling the playing field will spur economic innovation, improve technological techniques, boost job creation, and deliver even better customer experience and prices to the consumer.

Another development which is just as interesting is the market for big data.

Data could be rerouted from the proprietary black boxes of Google and Facebook and into a public market that puts a price on data.

If big data ever became a commodity sold from a market, it would mean that the accuracy of data would improve, and companies would be able to produce better products.

As it stands, big companies receive free data by the gimmick of giving away free services, these companies, in turn, manipulate and slice up the data any way they see fit to monetize.

I believe that the ad marketplace for Facebook and Google is somewhat of a broken and disconnected experience with many third-party companies questioning if it is a black hole that ad budgets are disappearing into.

The digital ad industry will undergo a serious facelift because of government regulation.

If big tech is divvied up, there will be winner and losers.

Not every tech company will survive the breakup because not every tech company is created equal.

A new type of digital marketplace will be formed once again allowing small business to bypass Facebook creating another tsunami of wealth creation.

If the FANGs aren’t broken up, then expect unfettered capitalism to go unperturbed, albeit with slow to moderate growth, instead of the renaissance I mentioned above.

Incremental gains cannot supplant wholesale enhancements.

This all means that your only choice is to own technology stocks in both scenarios – particularly the best of breed with the most cutting-edge technology.

The only way to suppress tech shares in the long run is if the American economy decides to socialize or nationalize big swaths of the private economy.

Let’s hope Washington doesn’t kill the goose that lays the golden eggs.

 

 

June 10, 2019

Global Market Comments
June 10, 2019
Fiat Lux

Featured Trade:

(JUNE 21 AUCKLAND NEW ZEALAND STRATEGY LUNCH)
 (MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE GRAND PLAN)
(MSFT), (GOOGL), (AMZN), (TESLA), (TLT), ($TNX)

June 6, 2019

Mad Hedge Technology Letter
June 6, 2019
Fiat Lux

Featured Trade:

(THE SHAKEOUT IN GAME STOCKS)
(GME), (MSFT), (GOOGL), (APPL), (STX), (WDC)

The Shakeout in Game Stocks

Do not invest in any video game stocks that don’t make video games.

If you want to simplify today’s newsletter down to the nuts and bolts, then there you go.

The company that I have been pounding on the table for readers to sell on rallies has convincingly proven my forecast right yet again with GameStop (GME) capitulating 35%.

It’s difficult to find a tech company with a strategic model that is worse than GameStop’s, and my call to short this stock has been vindicated.

Other competitors that vie for awful tech business models would be in the hard disk drive (HDD) market, and that is why I have been ushering readers to spurn Western Digital (WDC) and Seagate Technology (STX).

This is a time when everybody and their grandmother are ditching hard drives and migrating to the cloud, while GameStop is a video game retailer who is set up in malls that add zero value to the consumer.

This also dovetails nicely with my premise that broker technology or in this case retail brokers of physical video games are a weak business to be in when kids are downloading video game straight from their broadband via the cloud and don’t need to go into the store anymore.

Let’s analyze why GameStop dropped 35%.

The rapid migration of the digital economy does not have room to accompany GameStop’s model of retail video game stores anymore.

It’s a 1990 business in 2019 – only twenty years too late.

This model is being attacked from all fronts - a live sinking ship with no life vests on board.

GameStop was already confronted with a harsh reality and pigeonholed into one of a handful of companies in need of a turnaround.

This isn’t new in the technology sector as many legacy firms have had to reinvent themselves to spruce up a stale business model.

The earnings call was peppered with buzz words such as “transformation” and “strategic vision.”

And when the Chief Operating Officer Rob Lloyd detailed the prior quarter’s results, it was nothing short of a stinker.

Total quarterly revenue dropped 13.3% in Q1 2019 which was down from the prior year of 10.3%.

The headline number did nothing to assuage investors that the ship is turning around, it appears as if the boat is still drifting in reverse.

Diving into the segments, underperformance is an accurate way to capture the current state of GameStop with hardware sales down 35%, software sales down 4.3% and selling pre-owned products declining 20.3%.

Poor software sales were blamed on weaker new title launches this year and comping the strong data war launched last year with increasing digital adoption.

The awful hardware sales were pinned on the late stages of the current generation PS4 and Xbox One cycle with GameStop awaiting an official launch date announcement from Sony and Microsoft for their new console products.

Pre-owned business fell off a cliff reflecting tepid software demand for physical games and the increasing popularity of the various digitally offered products via alternative channels.

The only part of GameStop going in the right direction is the collectibles business that increased 10.5% from last year but makes up only a minor part of the overall business.

Management has elected to remove the dividend completely to freshen up the balance sheet slamming the company as a whole with a black eye and giving investors even less reason to hold the stock.

Indirectly, this is a confession that cash might be a problem in the medium-term.

The move to put the kibosh on rewarding shareholders will save the company over $150 million, but the ugly sell-off means that investors are leaving in droves as this past quarter could be the straw that broke the camel’s back.

They plan to use some of these funds to pay down debt, and GameStop is still confronted by a lack of transformative initiatives that could breathe life back into this legacy gaming company.

It was only in 2016 when the company was profitable earning over $400 million.

Profits have steadily eroded over time with the company now losing around $700 million per year.

Management offered annual guidance which was also hit by the ugly stick projecting annual sales to decline between 5-10%.

GameStop is on a fast track to irrelevancy.

If you were awaiting some blockbuster announcements that could offer a certain degree of respite going forward, well, the tone was disappointing not offering investors much to dig their teeth into.

Remember that GameStop is now on a collision course with the FANGs who have pivoted into the video game diaspora.

GameStop will see zero revenue from this development and a boatload of fresh competition.

Microsoft (MSFT) has been a mainstay with its Xbox business, but Apple (AAPL) and Google are close to entering the market.

Google (GOOGL) plans to leverage YouTube and install gaming directly on Google Chrome with this platform acting as a new gaming channel.

The new gaming models have transformed the industry into freemium games with in-game upselling of in-game items, the main method of capturing revenue.

The liveliest example of this new phenomenon is the battle royale game Fortnite.

Nowhere in this business model includes revenue for GameStop highlighting the ease at which game studios and console makers are bypassing this retailer.

In this new gaming world, I cannot comprehend how GameStop will be able to stay afloat.

Unfortunately, the move down has been priced in and at $5, the risk-reward to the downside is not worth shorting the company now.

The company is the poster boy for technological disruption cast in a negative light and the risks of not evolving with the current times.

 

 

BYPASSING THE RETAILER THANKS TO THE CLOUD

June 4, 2019

Mad Hedge Technology Letter
June 4, 2019
Fiat Lux

Featured Trade:

(THE GOVERNMENT’S WAR ON GOOGLE)
(GOOGL), (FB), (AMZN)

The Government's War on Google

I told you so.

It’s finally happening.

The Department of Justice (DOJ) preparing an antitrust probe on Google (GOOGL) was never about if but when.

The Federal Trade Commission is in the fold as well, as they have secured the authority to investigate Facebook (FB).

The probe will peel back the corrosive layers of Facebook and Google’s businesses such as search, ad marketplace and its other assets in order to excavate the truth.

Investors will get color on whether these businesses are gaining an unfair advantage and perverting the premise of fair competition that every tech company should abide by.

Tech companies skirting the law and living on the margins are in for a stifling reckoning if these probes pick up steam.

Facebook is about to get dragged through the mud kicking and screaming facing an unprecedented existential crisis that have repercussions to not only the broad economy for the next 50 years, but far beyond American shores with America mired in a trade war pitted against the upstart Chinese most powerful tech companies.

Even though I have consistently propped up Alphabet on a pedestal as possessing a few of the most robust assets in tech, I have numerous times flogged their dirty laundry in public view, referencing the regulatory risks that could rear its ugly head at any time.

These companies have been playing with fire and everyone knows it, but in the world of short-term results via stock market earnings report, this trade kept working until governments decided to get their act together because of the accelerating erosion of government trust partly facilitated by technology apps.

As much as a handful of Americans have monetized Silicon Valley to great effect, I can tell you that I spend a great deal of my time abroad, and American soft power is at a generational low ebb.

Blame technology - our dirty secrets are not only exposed in frontal view but it’s pretty much a 3D view of the good, bad, and the ugly and there is a lot of ugly.

I am not saying that punishment is a given for these ultra-rich firms swimming in money.

Historically, Alphabet has stymied regulators before beating out an antitrust investigation in 2013 after a two-year inquiry ended with the FTC unanimously voting to halt the investigation.

Remember that this time around, the probe follows the fine in Europe when The European Union slapped Google with a $1.69 billion for actively disrupting competition in the online advertisement sector.

The European Commission claimed that Google installed exclusivity contracts on website owners, preventing them from populating on non-Google search engines.

It was quite a dirty trick, but do you expect much of anything else from one of the most crooked industries in the economy?

And this wasn’t the first time that Google has run amok.

EU regulators levied a $5 billion penalty on Google for egregious violations regarding its dominance of its Android mobile operating system.

Google was accused by the EU of favoring its in-house apps and services on Android-based smartphones giving manufacturers no alternative but to bundle Google products like Search, Maps and Chrome with its app store Play ensuring that Alphabet would benefit from a lopsided arrangement.

Anti-trust legislation has a myriad of supporters including the current administration who have stepped up its onslaught on Silicon Valley.

President of the United States Donald Trump has even hurled insults at Amazon (AMZN) creator Jeff Bezos and even claimed that Alphabet’s artificial intelligence has aided China’s technological rise.

To say FANG companies are in the good graces of Washington would be laughable.

I would point to Facebook to accelerating the regulatory headwinds as investors have seen Co-Founder and CEO Mark Zuckerberg fire every major executive that has opposed his vision of merging Facebook, Instagram, and WhatsApp into a cesspool of apps that pump out precious big data.

The tone-deaf boss has doubled down to reinvigorate the growth after Facebook sold off from $210.

Board members want Zuckerberg out and he is defiant against any attack on his leadership spinning it around as a vendetta on his reign.

Facebook is walking straight into a minefield and the rest of Silicon Valley is guilty by association, the contagion is that bad.  

Facebook is the one to blame because of the daily nature of social interaction on its platform and the pursuance of revenue through hyper-targeting data that 3rd party companies pay access for.

They have no product.

Amazon sells consumer goods which is not as bad.

Facebook facilitates the social dialogue that has unwittingly boosted extremism of almost every type of form possible.

It has given the marginal and nefarious characters in society a platform in which to engineer devastating results and Facebook have an incentive to turn a blind eye to this because of the lust for user engagement.

This has resulted in heinous activities such as terror attacks being broadcasted live on Facebook like the 2019 New Zealand massacre at a mosque.

The former security chief at Facebook Alex Stamos hinted that Mark Zuckerberg’s tenure should wind down and the company needs to shape up and hire a replacement.

The security implications are grave, and many Americans have uploaded all their private information onto the platform.

What is the end game?

Facebook is in hotter water than Google, not by much, but their business model engineers more mayhem than Google currently.

Facebook could get neutered to the point that their ad model is dead and buried.

If Facebook goes down, this would unlock a treasure chest full of ad dollars looking for new avenues.

Facebook’s most precious asset is their data which might be blocked from being monetized moving forward.

Without data, they are worth zero. 

The existential risk is far higher for Facebook than Alphabet.

No matter what, Alphabet will still be around, but in what form?

Assets such as YouTube, Google Search, and Waymo, which are all legitimate services, could get spun out to fend for themselves creating many offspring left to sink or swim.

In this case, YouTube, Google Maps, Chrome, Google Play, and Google Search would still possess potent value and offer shareholders future value creation.

Waymo would become a speculative investment based on the future and would be hard to predict the valuation.

Then there is the issue of whether Chinese companies would dominate the collection of FANGs after the split or not.

As I see it, Chinese tech companies will not be allowed to operate in the U.S. at all, and anti-trust repercussions will have many of these homegrown tech companies carved out of their parents to reset a level playing field in a way to re-democratize the tech economy.

This would spur domestic innovation allowing smaller companies to finally compete on a national stage.

The government finally clamping down epitomizes the current volatile tech climate and how Alphabet who has some of the best assets in the industry can go from barnstormer to pariah in a matter of seconds.

As for Facebook, they have always had a bad stench.

The cookie could still crumble in many ways, each case looks high risk for Facebook and Google for the next 365 days.

Stay away from these shares until we get any meaningful indication of how things will play out, but I have a feeling this is just the beginning of a tortuous process.