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The Lopsided World of Tech

Is it unfair?

No, technology is afforded higher multiples than other industries and it’s completely justified.

Don’t allow anyone to convince you that tech companies are expensive because there are plausible reasons why they are expensive and will get even more expensive.

Technology sits on its perch as the single best investment opportunity of not only our lifetime but our children’s lifetime as well.

Huge capital investment is pouring into this glorious opportunity from gleaming offices on Wall Street to Sand Hill Road venture capitalists and even the Saudi Royal Family.

What is money not going into?

If you drive around the urban and suburban roads of America, it’s obvious that not much is going into new infrastructure.

America hasn’t even built a new airport for the past 30 years which CEO of JP Morgan loves to remind his followers of.

The sad truth is that capital is spilling over into the technology sector.

Eclipsing anything that you might believe, technology provides the optimal vehicle to innovate and evolve while offering a platform to incite a surge in performance and profitability.

The agent that is being harnessed to innovate and evolve is the software that is being programmed up to help a slew of other sectors.

Even if a sector hasn’t been touched by the tentacles of software innovation, they rarely stay virgin for long.

Much of the incubator stage capital is funnelled into considerable expenditures on research and development by technology companies, but also the capital is the catalyst to a reactionary tale of steroidal growth fueled by a pipeline of innovative products, services, and unique features.

​These products and services are then spread through and delivered to ancillary arteries that serve the subset of the broader economy.

The result is a massive tsunami in incremental productivity when high grade software supercharges every business that implements and integrates the software inside the confines of their business structure.

The supercharge effect of software rapidly forces companies to either evolve fast or go extinct, meaning that whole industries are transformed overnight when they get a whiff of what is happening with their competitor.

Computers and hardware used to take up entire warehouses – they were oversized, bloated, and tended to perform poorly at first.

The evolution of hardware has delivered shiny, modern pocket-sized devices packed with potency.

CEOs are able to manage companies of 10,000 employees just on a screen the size of a wallet all harnessed by, you got it – software.

Even more unbelievable is that the concept of technology must outdo itself, upgrading with every iteration in an increasingly short amount of time, or be cannibalized by a competitor in a blink of an eye.

In the survival of the fittest, the tech industry is the alpha male industry of the American economy.

Nobody understands in what form or shape it will manifest itself in just down the road but it will be the 800-pound gorilla in the room.

Even though software is the fulcrum of the tech industry today, it doesn’t mean it will always be that way.

Trends diverge quickly and you can even ask a semiconductor executive facing a bout of weakness stemming from geopolitical one-upmanship.

Semiconductor companies have been dragged into the middle of a hegemonic battle between the two most dominant economies in the world and revenues will degenerate short term.

Key semi products will not be relinquished because the artificial intelligence that complements these high-grade chips will be the crucial element that determines who runs the world once 5G networks are erected.

Taking away the building blocks that facilitates the artificial intelligence will make it more difficult to produce the finished product.

​Handheld devices are another product that has been sidelined for the time being because the global market is currently saturated by smartphones and tablets.

Software has been a key theme for the Mad Hedge Technology Letter and there are no signs of abatement for the foreseeable future.

The truth is that the world will not function without software as we know it and the omnipresence of software stems from the need to automate everything from healthcare devices down to autonomous vehicles.

Even better, software can withhold devastating economic capitulation as many of these companies have bought in to the software miracle and is a fixed part of their model that can’t be replaced.

Just the bare bones type of model badly needs sufficient IT functions to survive.

Then consider that cybersecurity is more and more a part of management’s plan to protect the digital fort from the back to front.

Software requires minimal infrastructure and is difficult to protect via patents or copyright to any effective degree signaling that if software isn’t perpetually improving, they are at risk of being disrupted.

The low barriers of entry consequently mean grassroots start-ups with innovative, game-changing products can appear with a wave of a wand.

After-sales support of the software is becoming a critical part of revenue as software is becoming more complex and requires granular consultation to apply the full range of capabilities demanded of it.

Software as a service (SaaS) is the new payment model that has also poured gas onto the revenue flames.

Software programs used to be purchased once for a fixed price.

The exchange of tender resulted in the consumer obtaining CDs that they inserted into a personal computer hard drive then installed on the desktop.

The technology industry shaped up and realized it could not only extract a one-time fee for software services but accrue an annual fee with the promise of timely and prompt upgrades via the cloud.

A win-win situation unfolded.

In some cases, this has allowed the same companies to make 500% more from the same product and deliver higher performance through enhanced functionality by deploying frequent updates.

And yes, the trade war is stealing some of the tech industries mojo, but software stocks will be most insulated.

The long-term trends are still intact and investors must understand these stocks have had incredible run-ups the past few years, not to mention a great first half of 2019 that saw most software stock rise over 30%.

Investors should be patient and advantageous entry points will be served on a platter but also differentiate between good and bad software stocks.

 

 

July 8, 2019

Mad Hedge Technology Letter
July 8, 2019
Fiat Lux

Featured Trade:

(YOUR UNCONSCIOUS FUTURE)
(FB), (GOOGL)

Your Unconscious Future

This might be one of the most important newsletters you will ever read.

Economies are mainly defined by seismic revolutions, for example, the industrial revolution that cut down simple, archaic jobs to machinery.

As we are on the verge of shuttering the technological revolution that brought us a party bag of treats like the internet, search engines, smartphones and the personal computer, we must brace ourselves for what is next.

Industry 4.0 is the concept of dazzling smart factories augmented by machines connected to a cloud network and software that processes the operations within the system.

The productivity enhancement will boost performance as machines will be able to visualize and surgically solve problems by applying the software that powers it.

Data exchange in manufacturing technologies which include cyber-physical systems (CPS), the Internet of things (IoT), the Industrial Internet of Things (IIOT), and cognitive computing are concepts that will define Industry 4.0.

As income inequality rears its ugly head and becomes center to what politicians run campaigns on, the world must brace for yet another tsunami of unrivaled job loss on levels that we have never seen before.

The social upheaval that economic chaos will create and offer investors monumental investment opportunities.

One of the manifestations of technological evolution is the optimization of business processes through automation, meaning less people are involved in the value creation process.

The global population is on the verge of mushrooming from 7.7 billion people in 2019 to 10.9 billion in 2100.

If you think overpopulation and sharing the world’s resources are a problem in 2019, then wait until 2050 when more people are squeezed out of revenue windfalls.

This effectively means the global middle class will accelerate its demise as the job market will bifurcate into a narrow sliver of clear winners and mostly losers and not the muddied version of what we have now.

The first Industrial Revolution also delivered uncertainty that hung over the whole job market, but the world was diverse enough and had ample resources to absorb the negative impact.

The global overpopulation is connected to the economy in the sense that most babies will be born outside of developed industrial economies and the world will see a fiercer rush to gain access to jobs in places such as London, Frankfurt, New York, Tokyo, and Silicon Valley.

The net effect of A.I. could be debated all day, specifically whether the absolute progress made in the development of industry and the products that revolve around it outweigh the torrent of human suffering that it will cause to billions of people who are not employable in that job market.

With exponential computational power to apply A.I., existing behavior will change in society and new cultures will be created because of it.

Economic value will not correlate to the amount of people like it once was, countries like Japan have dived headfirst into automating as much as possible with the best in class technology in robotics.

The world which we know it in 2019 is in the last legs of a nostalgic phase with baby boomers clinging on to what they know growing up in the 1950s.

Soon, that will be eradicated and Millennials will pour what they know and the fallacies they support into the system that is supported by algorithms and machine learning as the first human generation to be technology natives.

We are on the cusp of transformative shifts in the world.

In the next 25 years, technology will start migrating into the chambers of neuroscience.

Technology has discovered that more than 99.99% of human behavior happens at an unconscious level and that the unconscious brain is 10 times faster than the conscious brain.

While at any point of time, the conscious brain can focus only on one task, the unconscious can easily execute infinitely more.

The aspects of human behavior that the rational world has pinpointed is the conscious mind which is an ill-suited representative of human behavior.

The mechanics of the unconscious brain is stuff out of science fiction in 2019 but that will slowly change.

Consciousness has no understanding of what is happening in one’s own unconscious.

Science will be required to squeeze out a mechanism to discern the type of data humans can produce to mold this future subset of technology.

Modern qualitative techniques must be developed to be able to extract data from this important pool of knowledge.

Corporations are at the forefront of this trend and tech power brokers such as Co-Founder and CEO of Facebook Mark Zuckerberg hopes to one day install a chip into consumers’ brain so that consumers can access the global network from the brain.

A scary thought but a thought gaining traction, nonetheless.

Ideally, the morally attuned stakeholders carry out the process of benefitting humankind instead of enriching a select few.

That will also be a battle that will define the next generation.

Increased focus on the unconscious processes will cause headaches for companies and there will likely be a numerical cost placed on the data it generates after companies like Facebook (FB) and Google (GOOGL) ran wild with abusing free personal data for decades.

Monitoring and managing the unconscious processes of consumers and employees will be hard at first and then society must assess if this violates privacy or not.  

Unconsciousness works best when humans are sleeping or resting.

How can companies capture data on how well someone is using her unconscious brain?

This will befuddle tech companies until there is a solution.

Paradigm shifting scientific discoveries and human innovations have emanated from unconscious processes of the human brain in the past.

We still understand little about how powerful this data could become.

The current emergence of AI will be rooted purely in consciousness and the data that revolves around it, but the problem is that this data isn’t entirely accurate.

In capturing absolutes about complicated topics with current machine learning techniques, it doesn’t synthesize the fact that many areas of the human world deal in many shades of grey.

That is why A.I. is not that good today.

The next big find is if a company doubles down on the unconscious processes and that leads to groundbreaking discoveries in the understanding of accurate human behavior and thought.

 

 

 

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