Mad Hedge Technology Letter
January 12, 2022
Fiat Lux
Featured Trade:
(JUMP OFF THE ROKU BANDWAGON)
(ROKU), (GOOGL), (AMZN)
Tag Archive for: (GOOGL)
Many “experts” have been advising investors to buy the dip in Roku (ROKU) since it dropped to $370 from the peak of $480 it reached in July 2020.
These experts kept banging the drum to buy the dip on Roku as it slid to $350 then $320.
The calls for dip-buying continue as Roku nosedived to $280 then most recently on a downgrade, Roku fell all the way to $177.
Painful as it feels to be an investor in Roku, this is not the time to double down on high-tech growth stocks.
Growth tends to usually overshoot to the upside as investors give a pass to growth for losing money and selectively put a premium on high growth rates.
But that deal is only valid in a low-interest rate environment and what we are witnessing is the reverse happen as investors are bolting from Roku like stallions out the back of a stable.
At a micro level, there is somewhat distaste at the ever-increasing competition Roku is facing and the lack of growth prospects overseas.
Overseas is usually the growth engine for many of these streaming cohorts, but the dilemma here is that margins are lower because of a poor purchasing power profiles for the median consumer overseas.
That’s not to say it’s easy to succeed in the U.S. — hardly so.
However, Roku’s business in the United States has been highly successful, but the issue here is that the market is getting somewhat saturated and since the stock market is priced based on future cash flow, where does the incremental buying come from to save Roku’s stock?
Roku faces a perilous uphill challenge to convince the incremental platform user to install its Roku stick at a time when Amazon (AMZN) and Google (GOOGL) are using their greater clout and sharper elbows to get rid of the tech peons.
Amazon reported sales of over 150 million Fire TV devices recently. Roku has over 56 million active accounts, although it’s not a direct comparison because Amazon’s figure counts sold devices and includes Fire TV devices that are not being used.
There is no possible way that Roku can secure 50% of the market here and 40% would be a stretch capping its ceiling.
Another leery signal came when smart television maker TCL who have partnered to make the Roku smart TV decided to jump ship to Google.
This could represent a red flag as these bigger companies have the capacity to poach talent, know-how, and convince suppliers to jump ship with a more lucrative contract for a larger install base.
This could be the first point of contact that could eventually lead to Google buying out TCL and cutting off Roku from a source of a hardware supplier.
TCL has now claimed to be one of the biggest sellers of sets featuring Google’s connected TV operating system and the partnership will take precedence over anything Roku is involved with.
In the short term, readers need to stay away from Roku as we need more commentary on how it plans to shake off Google and Amazon and how it plans to navigate a perceived saturation in its domestic business while underperforming overseas.
Granted, it’s intimidating to go up against Google and Amazon because there are less tools available in the tool kit in terms of stacking resources and convincing consumers that they are indeed a higher quality product.
Long term, I don’t see it for Roku.
Short term, it’s dicey at best.
This stock promises to be volatile in the next three months and actively trading this stock will probably mean selling sharp rallies and avoiding dips.
The first-mover advantage was stellar for a while and Roku rode that donkey up the mountain of success, but now as reality sets in and the first-mover advantage dissipates, they need a miracle or should just negotiate to sell itself while the stock price is still near $200.
It’s sink-or-swim at this point.
Mad Hedge Technology Letter
December 20, 2021
Fiat Lux
Featured Trade:
(GETTING AHEAD WITH THE CLOUD)
(AMZN), (ZS), (CRM), (GOOGL)
Dealing with the Cloud works and for every relevant tech company, this division serves as the pipeline to the CEO position.
If this isn’t the case for a tech company, then there’s something egregiously wrong with them!
Take Andy Jassy, the mastermind behind Amazon’s (AMZN) lucrative cloud computing division and is the man who succeeded company founder Jeff Bezos.
He’s been rewarded this important position based on his performance in the cloud and faces a daunting proposition of following Bezos as CEO.
Bezos incorporated Amazon almost 30 years ago.
Jassy developed a highly profitable and market-leading business, Amazon Web Services, that runs data centers serving a wide range of corporate computing needs.
Cloud 101
If you've been living under a rock the past few years, the cloud phenomenon hasn't yet passed you by and you still have time to cash in.
You want to hitch your wagon to cloud-based investments in any way, shape, or form.
Amazon leads the cloud industry it created.
It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.
Amazon relies on AWS to underpin the rest of its businesses and that is why AWS contributes most of Amazon's total operating income.
Total revenue for just the AWS division would operate as a healthy stand-alone tech company if need be.
The future is about the cloud.
These days, the average investor probably hears about the cloud a dozen times a day.
If you work in Silicon Valley, you can quadruple that figure.
So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.
Think of this as a cloud primer.
It's important to understand the cloud, both its strengths and limitations.
Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest-growing companies in the world.
Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that is where I come in.
Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.
They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb-proof.
As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained, and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.
The most important features of cloud storage are:
1) It is a service provided by an external provider.
2) All data is stored outside your computer residing inside an in-house network.
3) A simple Internet connection will allow you to access your data at any time from anywhere.
4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.
Once you start using the cloud to store a company's data, the benefits are many.
No Maintenance
Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.
However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.
Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.
Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.
Greater Flexibility
Today's employees want to have a better work/life balance and this goal can be best achieved by letting them work remotely which effectively happened because of the public health situation. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.
How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?
Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees.
With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.
It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.
Better Collaboration and Communication
In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.
For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.
These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.
Data Protection
Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.
And we haven’t talked about the recent ransomware attacks by Eastern Europeans on energy company Colonial Pipeline and meat producer JBS Foods.
The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.
It's best to move data to the cloud, to avoid such disruptions because there, your data will be stored in multiple locations.
This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.
Lower Overhead
The cloud can save businesses a lot of money.
By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.
Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.
The cloud is where you want to be.
Mad Hedge Technology Letter
December 15, 2021
Fiat Lux
Featured Trade:
(BUY THE DIP IS BEING CHALLENGED)
(PTON), (ROKU), (TSLA), (GOOGL), (FB), (DOCU), (TDOC)
Ominous signals have started to emerge in the short-term patterns of tech stocks over the past few weeks.
We have essentially traded a Santa Claus rally to sell the spiked peaks as inflation numbers have come in way too hot for anyone to handle.
The poor inflation numbers have triggered a cascade of algorithmic selling.
Why is this important?
These stock patterns will offer us clues to how tech stocks will react in a quickly changing backdrop where the Fed is backing away from the cheap money cauldron as fast as it can.
For over ten years now, as tech stocks have bulldozed their way to higher highs and as Apple inches closer to $2.9 trillion in market cap and on its way to $3 trillion, investors have been systematically conditioned to buy the dip.
The Fed is doing its best to recreate a new type of conditioning where the dip is not bought and that is awful for tech stock prognosticators.
This effectively means a large layer of buyers on down days will be stripped away from the tech markets.
Any idiot would understand this means that tech stocks will not go as high as they could if dip buying is conditioned.
The tech market is trying to figure out the new rules of the game and that is resulting in choppy patterns almost in whipsawing fashion.
March 2022 is the new consensus for an interest rate rise which is bad news for tech stocks because pulling forward interest rate rises coincides with higher volatility in the short term.
The Fed could make another interest rate move in the second half of 2022.
This means that anyone dallying in the speculative area of the tech market needs to pull the reigns in immediately.
Stocks like Peloton (PTON), essentially a stationary bike with a tablet pasted on the dashboard, will historically underperform in the new environment.
Another tech stock I love to bully is Pinterest (PINS), by far the worst social media platform I have ever seen, will need to face reality without the Fed punchbowl that was most likely their biggest tailwind.
Tech stocks must now stand on their two feet and that’s scary news for all tech stocks not named Tesla, Facebook, Apple, Amazon, Microsoft, and Google.
After these top 5, the quality dwindles fast and expect a slew of rapid downgrades that will throttle the non-elite software stocks.
Adobe’s stock had its second-worst day of the year on Tuesday, as analysts jumped on the higher rates bandwagon and cited high valuations.
Valuations are now “high” even if these business models are the same as they were a few days ago.
Expect poor guidance from management with earnings growth, free cash flow, and annual revenue downgrades in the pipeline.
Other notable sell-offs this week include shares of cybersecurity companies Zscaler and Cloudflare, which crumbled 7.8% and 9%, respectively.
Zscaler had been up 55% for the year, prior to Tuesday, and has an enterprise value to revenue multiple for 2022 of 39. Cloudflare was up 91% and trades at a multiple of 61.
Tech growth works both ways in which they get the benefit of the doubt in a low-rate environment and vice versa in a tightening environment.
Case in point is a company I really like Roku (ROKU) whose shares are down a hideous 230% since mid-July.
The weakness in the secondary names has been biggest secret untold in tech for quite a while and the confirmation of a tough 2022 was what happened in the first two weeks of December.
And it gets worse when looking at the shelter-at-home darlings of 2020 Teledoc (TDOC) and DocuSign (DOCU) who have been totally neglected this year.
This goes to show that every year is different and as the stock market is levered to the skies, the slightest nudge by the Fed does a lot to wobble the trajectory of tech.
Luckily, tech still has the 6 big tech stocks to rally around and even if the best of the rest must go into hibernation in 2022, we still got guys like Mark Zuckerberg, Tim Cook, Elon Musk powering us through the sludge.
Mad Hedge Technology Letter
November 22, 2021
Fiat Lux
Featured Trade:
(RENOMINATION BOOSTS BIG TECH)
(FB), (GOOGL), (AMZN), (MSFT), (AAPL)
U.S. President Joe Biden is doing all he can do to make sure that the US Central Bank stays accommodative to big tech investors.
He let the doves back in the driving seat which is highly positive for corporate America and terrible for penny-pinching savers.
Biden’s decision to re-elect incumbent Fed Chair Jerome Powell was cheered by the market locking in his ultra-low interest rate policies for yet another term.
Even more brazen was the appointment of Vice Chair, an even more pronounced dove Dr. Lael Brainard.
The second in command often helps signal Fed policy and gives it a dovish twist and clears the way for all systems go in 2022.
Any inclination that interest rates would rise faster than expected is now a non-starter, and the Fed will push its "lower for longer" mantra in the face of surging inflation for as long as they can make excuses for it.
Ostensibly, the path of easiest conjecture leads me to say that the five biggest stocks in the S&P 500 – Facebook, Apple, Amazon, Microsoft, and Google, which are around 30% of the market and growing, will do well in 2022.
Long-term, they have comprised an average of about 14% of the entire stock market, and 2022 should be the year they knock on the 35% threshold.
This essentially means that the stock market is techs to win or lose and everyone else is just a footnote.
And yeah I know…it’s been like that for quite a while now; but it’s more prevalent than ever.
We are rolling into a year where big tech will weaponize their cash horde to issue low-interest corporate bonds of their own company debt and then spin those cash harvests into higher rate corporate bonds that cheapen their cost of doing business because they pocket the higher interest payments as profits.
Industry leaders are able to borrow more cheaply and in greater quantities, and the size of their balance sheets also offers incredible optionality.
This also means they can buy back more shares and also leverage up their balance sheets.
Preferential access to cheap money also cheapens the process of expansion, or in buying rivals, more easily. In effect, lower rates give leading companies an unfair set of tools to accelerate their dominance and which no regulator dares to prevent.
What does this mean in practice for investors? If falling rates have spiced up valuations of the biggest tech stocks on the way up, it implies they may struggle if rates rise, particularly as this would mean investors place less of a premium on future earnings.
But since the expectations are lower for longer, the market will be comfortable with the nominal rate even in the face of surging inflation, meaning it’s a net positive for tech stocks in 2022.
Powell and Baird will move as slow as needed and anything faster than that will shock the tech market and we will get a 5% drop which will be a golden buying opportunity.
I have read many experts’ take on tech preaching that regulation is here and coming fast to take down big tech.
However, I am in the camp that Congress will do hardly anything, and any investigation will end with a slap on the wrist which is fine.
I don’t subscribe to this ridiculous idea that superstars eventually tend to fall to earth.
I believe the current climate has set up big tech to gain an even bigger market share, crush the little guy faster, and trigger EPS to grow uncontrollably.
That’s what I am seeing on the ground with my own eyes, as opposed to baseless claims that big tech will revert back to the mean.
This sets the stage for big tech to benefit from such elevated rates of profitability next year, they will be happy to overpay for smaller companies to whom they will give an ultimatum to either sell up or get killed by them.
Numerous signs point to a devastatingly profitable and comically successful 2022 for the most recognizable and biggest tech firms who will refine their tech and harness their balance sheets in a systematically lethal way.
Unprofitable startups have a mountain climb as it relates to competing in their industries and they can thank President Joe Biden for that; they will be unduly penalized as a group that will result in lower share prices that force them to crawl on their knees to venture capitalists for capital injections.
Global Market Comments
November 8, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or A PERFECT UPSIDE STORM),
(GOOGL), (MSFT), (GS), (MS), (BRKB), (ROM), (TLT), (TBT)
(BITO), (ETHE)
Welcome to the perfect storm.
If there was ever any doubt that the market was going straight up for the rest of the year, it was dashed when the infrastructure budget passed on late Friday night with bipartisan support. Another $1.2 trillion will be dumped into the economy next year, adding 6% to GDP growth.
Of course, the stock market started sniffing out this possibility and resumed racing yet again to new all-time highs on September 30.
The latest round of earnings reports proved that corporate profit margins are exploding, along with profits. Demand is through the roof. It turned out that demand WASN’T lost, just deferred, as I vociferously begged followers to buy stocks at the April 2020 bottom.
Interest rates went down instead of up sharply on news of the Fed taper.
And the 10% correction that many expected never showed, forcing managers to chase the market so they can be seen as fully invested in the right names at yearend. That means buying more Alphabet (GOOGL), Microsoft (MSFT), Goldman Sachs (GS), and Morgan Stanley (MS) at whatever price so managers can look like the brilliant people that they really AREN’T.
There is no doubt that the economic data is turning from mixed to red hot.
We will see a Capital spending renaissance in 2022 as the economy shifts from manufacturing to service-driven, and services account for 80% of US GDP. It’s a perfect formula for an economy that is catching on fire.
As for the missing 5 million workers, I think what we are seeing is a 9/11 effect. That’s when people become aware of the transitory nature of life and ask themselves why they are working at a job they hate, some 80% of the labor force, especially at the minimum wage level. They retrain for better-paying, more meaningful professions, retire early, or otherwise go missing in action.
There is another category of missing workers: those who have made so much in the stock market and Bitcoin in the last 18 months they never have to work another day in their life. Are there 5 million of them? Maybe.
And how come everybody in the world knows that interest rates are rising except the bond market? The United States Treasury Bond Fund (TLT) has seen two, count them, two massive three-point RALLIES in the last ten days. The (TLT) may give all this back this week when we get hot inflation data.
It is a positioning issue and a classic “buy the rumor, sell the news” on interest rates. When the entire world is short bonds, they can only go UP. This means we are likely to see a $141-$151 (TLT) range in bonds for the next six months until we start to see actual interest rate RISES.
The Fed Tapers! The Fed taper starts immediately and will accelerate in 2022 until it goes to zero by June. Stocks took off, while bonds dove a $1.50 as soon as they noticed that “transitory” was missing from the release. Will the first interest rate hike in four years be moved up to June? Or do we get a double rate hike in December 2022? That’s where we may see the real volatility, after the market close. Semiconductor growth stocks hit new all-time highs. Financials moving back to highs, as are big tech stocks.
Q3 GDP comes in at a weak 2.0%, down from a 6% rate in Q2, thanks to the ravages of the delta virus, now in the rearview mirror. What happens next? That 4% wasn’t lost, just deferred into 2022. The rip-roaring 6% growth rate returns. That’s why stocks are pushing up to new all-time highs right now. I’m looking for a 5% growth rate next year as government stimulus spending eventually fades.
Nonfarm Payroll Report explodes to the upside in October at 531,000. The Headline Unemployment Rate drops to 4.6%. Pandemic benefits have ended, and a wider vaccination rate encouraged workers it is safe to go back on the job. The back months were revised up 250,000. Manufacturing was up 60,000 and Leisure & Hospitality was up 164,000, The U-6 “discouraged worker” unemployment rate fell to 8.3%. And there is massive pent-up hiring is yet to come. The US could see full employment by the end of Q3 anticipating a 6% GDP growth rate. The markets loved it and the (SPY) is zeroing in my $475 yearend target.
Inflation is rampaging, according to the Department of Commerce, which saw a sizzling 4.4% rate in September. That’s the fastest rate in 30 years. Rising energy and wage costs are big issues. This is why Goldman Sachs has moved up its forecast for the first interest rate rise to July 2022.
US Consumer Spending bounces back, up 0.6% in September after a hot 1% move in August. Demand for services took the lead as shortages head off spending on goods, like cars.
Ethereum hits a new all-time high, ticking at $4,670 in response to the Fed’s immediate taper. Bitcoin is still consolidating its recent three-month doubling. Buy (BITO), (ETHE), and (BLOK) on dips.
US Stock Buy Backs hit record in Q3, topping a staggering $224 billion, and the best is yet to come as companies try to burn through 2021 repurchase budgets. And you wonder why the stock market is going up?
US Dollar hits one-year high on red hot jobs data, presaging higher interest rates. Everyone seems to know that rates are rising except the bond market.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
My Mad Hedge Global Trading Dispatch saw a massive +8.95% gain in October, followed by a decent 1.74% so far in November. My 2021 year-to-date performance maintained 90.30%. The Dow Average is up 16.7% so far in 2021.
After the recent ballistic move in the market, I am continuing to run my longs in Those include (MS), (GS), (BAC), (BRKB), and a short in the (TLT). All are approaching their maximum profit point and we have nothing left but time decay to capture. So, I am going to run these into the November 19 expiration in 9 trading days. It’s like having a rich uncle write you a check one a day.
That brings my 12-year total return to 512.85%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 43.04 easily the highest in the industry.
My trailing one-year return popped back to positively eye-popping 112.94%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 46.5 million and rising quickly and approaching 755,000 deaths, which you can find here.
The coming week will be all about the inflation numbers.
On Monday, November 8 at 9:00 AM, US Consumer Inflation Expectations for October are out. PayPal reports.
On Tuesday, November 9 at 8:30 AM, the all-important Producer Price Index is published. DR Horton (DHI) reports.
On Wednesday, November 10 at 8:30 AM, the Core Inflation Rate for October is printed. Walt Disney reports (DIS).
On Thursday, November 11 at 8:30 AM, Weekly Jobless Claims are announced.
On Friday, November 12 at 8:30 AM, the University of Michigan Consumer Sentiment is announced.
At 2:00 PM, the Baker Hughes Oil Rig Count is disclosed.
As for me, dentists find my mouth fascinating as it is like a tour of the world. I have gold inlays from Japan, cheap ceramic fillings from Britain’s National Health, and loads of American silver amalgam.
But my front teeth are the most interesting as they were knocked out in a riot in Paris in 1968.
France was on fire that year. Riots on the city’s South Bank near Sorbonne University were a daily occurrence. A dozen blue police buses packed with riot police were permanently parked in front of the Notre Dame Cathedral ready for a rapid response across the river.
President Charles de Gaulle was in hiding at a French airbase in Germany. Many compared chaos to the modern-day equivalent of the French Revolution.
So, of course, I had to go.
This was back when there were five French francs to the US dollar and you could live on a loaf of bread, a chunk of cheese, and a bottle of wine for a dollar a day. I was 16.
The Paris Metro cost one franc. To save money, I camped out every night in the Parc des Buttes Chaumont, which had nice bridges to sleep under. When it rained, I visited the Louvre, taking advantage of my free student access. I got to know every corner. The French are great at castles….and museums.
To wash I would jump in the Seine River every once in a while. But in those days, not many people in France took baths anyway.
I joined a massive protest one night which originally began over the right of men to visit the women’s dorms at night. Then the police attacked. Demonstrators came equipped with crowbars and shovels to dig up heavy cobblestones dating to the 17th century to throw at the police, who then threw them back.
I got hit squarely in the mouth with an airborne projectile. My front teeth went flying and I never found them. I managed to get temporary crowns which lasted me until I got home. I carry a scar across my mouth to this day.
I visited the Left Bank just before the pandemic hit in 2019. The streets were all paved with asphalt to make the cobblestones underneath inaccessible. I showed my kids the bridges I used to sleep under, but they were unimpressed.
But when I showed them the Mona Lisa at the Louvre, she was as enigmatic as ever.
Everyone should have at least one Paris in 1968 in their lifetime. I’ve had many and am richer for it.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
1968
2019
