Mad Hedge Technology Letter
July 15, 2020
Fiat Lux
Featured Trade:
(CLOUD 101)
(AMZN), (MSFT), (GOOGL), (DOCU), (CRM), (ZS)
Tag Archive for: (GOOGL)
If you've been living under a rock the past few years, the cloud phenomenon hasn't 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 (AMZN) 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 triple 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's 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 telecommute. 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.
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.
Mad Hedge Technology Letter
July 1, 2020
Fiat Lux
Featured Trade:
(HOW THE “SPLINTERNET” IS TAKING OVER)
(TIKTOK), (FB), (GOOGL), (TWTR), (AMZN)
The balkanization of the internet is spiking in the short-term, knocking off the value of multiple Fortune 500 companies in one fell swoop.
In technology terms, this is frequently referred to as “splinternet.”
A quick explanation for the novices can be summed up by saying the splinternet is the fragmenting of the Internet, causing it to divide due to powerful forces such as technology, commerce, politics, nationalism, religion, and interests.
What investors are seeing now is a hard fork of the global tech game into a multi-pronged world of conflicting tech assets sparring for their own digital territory.
The epicenter of balkanization is now heart and center in West Asia polarizing the Indian and Chinese tech economy after a skirmish along the shared border.
This is fast becoming a winner-take-all affair.
India had to do something after 20 dead Indian soldiers felled by the Chinese Army stoked a wave of national outcry against regional rival China.
The backlash was swift with the Indian government banning 59 premium apps developed by China citing “national security and defense.”
The ban includes the short-form video platform TikTok, which counts India as its biggest overseas market.
TikTok was projected to easily breeze past 300 million Indian users by the end of 2020 and was clearly hardest hit out of all the apps.
India is the second biggest base of global internet users with nearly half of its 1.3 billion population online.
The government rolled out the typical national security playbook saying that the stockpiling of local Indian data in Chinese servers undermines national security.
The ruling will impact roughly one in three smartphone users in India. TikTok, Club Factory, and UC Browser and other apps in aggregate tally more than 500 million monthly active users in May 2020.
Highlighting the magnitude of this purge - 27 of these 59 apps were among the top 1,000 Android apps in India last month.
China dove headfirst into the Indian market with their smartphones, apps, and an array of hardware equipment. Now, that is all on hold and looks like a terrible mistake.
Chinese smartphone makers command more than 80% of the smartphone market in India, which is the world’s second largest.
One of the reasons Apple (AAPL) could never make any headway in China is because they were constantly undercut by predatory Chinese phone makers with stolen technology.
TikTok is also being eyed-up for bans in Europe and the United States recently as it constantly curries to Beijing’s every whim by banning content unfavorable to the Chinese communist party and rerouting data back to servers in China.
I am surprised it hasn’t happened yet with an abundant phalanx of Chinese hawks in the conservative administration.
To be fair, China has rolled out the same playbook before when the state spews out nationalist narratives triggering local furor that resulted in bashing Japanese-made cars or shuttering Korean supermarket.
Chinese tech is clearly the main loser for their government’s “distract its own people at all costs” campaign to shield themselves from the epic contagion of the lingering pandemic.
What does this mean for American tech?
For one, India will strengthen ties with the U.S., being the biggest democracy in Asia, meaning a massive foreign policy loss and loss of face for the Chinese communist regime.
The resulting losses for Chinese tech will usher in a new generation of local Indian tech with Silicon Valley being the next in line playing the role of a wingman.
Even though the U.S. avoided the carnage from this round of balkanization, the situation in Europe is tenuous, to say the least.
Fault lines will compound the problem of a multinational tech revenue machine and the relationship with France is on the verge of becoming fractious.
I believe if the relationship worsens with the Europeans - France, Germany, and Britain could ban big tech companies like Facebook (FB), Twitter (TWTR), Google (GOOGL).
This would be a massive blow to not only revenue streams but also global prestige for American tech.
The U.S. is still licking its wounds after the EU announced a travel ban on American tourists who hoped to re-enter the Schengen Zone on its reopening on July 1st.
Not only do Silicon Valley leaders see a murky future outside its borders, but digital territories are also getting carved out as we speak domestically.
Amazon (AMZN)-owned Twitch and Twitter have clamped down on U.S. President Donald Trump’s account.
This could quickly spiral into a left-versus-right war in which there are competing apps for different political beliefs and for every subgenre of apps.
This would effectively mean a balkanization of tech assets within U.S. borders and division is the last thing Silicon Valley wants.
Silicon Valley wants products sold to the largest addressable market possible.
The balkanization of the internet is now turning into an equally high risk as the antitrust and regulatory issues.
The issues keep piling up, but nothing has been able to topple big tech yet as they lead the broader market out of the pandemic.
The key point to understand is that these are growing risks until they blow up in front of your eyes and become the next black swan like Covid-19.
Let’s hope that never happens.
SUPERCHARGING THE BALKANIZATION OF THE INTERNET
Mad Hedge Technology Letter
June 15, 2020
Fiat Lux
Featured Trade:
(DON’T TAKE YOUR EYES OFF BIG TECH SHARES),
(GOOGL), (AAPL), (MSFT), (NFLX), (FB), (AMZN), (IBM), (CSCO)
There is literally no possible scenario in a post-second-wave lockdown where the 7 tech stocks of Facebook, Google, Apple, Microsoft, Netflix, Facebook, and Amazon don’t shoot the lights out unless the world ceases to exist.
25,891 – that is the number of new coronavirus cases registered in the U.S. on June 13th, 2020 which is about in line with the recent near-term peaks of total daily U.S. coronavirus cases.
Why is this important?
Traders are calculating whether a “second wave” will possibly rear its ugly head to crush the frothy momentum in tech stocks.
That is where we are at now in the tech market.
Tech stocks could possibly ride another magnificent ride up in share appreciation if the reopening of the economy can kick into second gear.
Skeptics are sounding the alarms that this is not even the “second wave” and we still in the latter half of the first wave.
Consensus has it that this could be just a head fake.
The jitters are real with recent dive in tech shares.
The five biggest tech companies burned more than $269 billion in value last Thursday - the worst day for U.S. stocks since March and the 25th worst day in stock market history.
Nasdaq stocks ended the day largely 5% in the red with Microsoft shedding $80 billion in market cap in just one day.
Larger drops were led by IBM who lost 9% and Cisco who lost 8%.
It was a dreadful day at the office, to say the least.
We are teetering on a knife's edge and the tension is running high in the White House with Treasury Secretary Steven Mnuchin already announcing that the U.S. can’t afford another lockdown.
It’s not up to him in the end, it’s about how consumers will assess the confronted health risks.
Tech will undoubtedly be dragged down with the rest on the next lockdown sparing few survivors.
The housing market might actually go down as well as the initial push to the suburbs will dissipate and fresh forbearances will explode higher.
Consumers might not even have the cash to pay for their monthly Apple phone service or internet bill if the worst-case scenario manifests itself.
The health scare has already dented new software purchases by small and medium businesses (SMBs) and tech companies in industries such as travel, retail, and hospitality; online ad spending by the likes of automakers and online travel agencies; and smartphone, automotive and industrial chip purchases.
Small business has held off on reducing their tech software spending too much on the expectation that macro conditions will perform a V-shaped recovery.
Numerous tech firms have cited “demand stabilization,” but it’s not guaranteed to last if we revert to another lockdown.
If a lockdown happens again, it will be another referendum on Fed’s enormous liquidity impulses versus the drop in real earnings or flat out losses to tech business models.
Even with the media’s onslaught of vicious fearmongering campaigns, I do believe this is the time for long-term investors to scale into the best of tech such as Amazon, Apple, Google, Microsoft, Facebook, Netflix.
If you thought these 7 companies had anti-trust issues before, then look away.
We could gradually head into an economy where up to 40% of the public markets comprise of only 7 tech stocks which is at a mind-boggling 25% now.
Never waste a good crisis – tech is following through like no other sector!
Bonds don’t make money anymore and hiding out now means putting your life savings into these 7 premium tech stocks.
In the short-term, this is a good opportunity for a tactical bullish tech trade.
Mad Hedge Technology Letter
June 5, 2020
Fiat Lux
Featured Trade:
(EUROPE’S BIG TECH TAX GRAB),
(COMPQ), (NFLX), (APPL), (AMZN), (GOOGL), (MSFT)
Big Tech regulation gets the protection of the U.S. government.
The U.S. government has announced that it is looking into aggressive regulation originating from foreign countries that would die to have a FANG themselves.
This is just another salient data point to which tech will lead us through the maze of complexity that the world now finds itself in.
Many jumped on the bandwagon saying it was a matter of time before regulation destroys big tech, but I will argue that big tech has become too big to fail and the value generated from stock appreciation and tax revenue has become even more important.
Tech has been the only industry to not get pummeled by the coronavirus and the ramifications of social unrest.
The U.S. government doesn’t want to tip over the last remaining pillar the U.S. economy is clinging to, they are desperate to allow the U.S. tech models to stay intact.
The Federal and State budgets have massive holes in them and crushing tech’s contribution to the revenue coffers would be political suicide.
Understanding how the administration cherishes big tech means viewing them through the prism of how other countries treat U.S. tech companies hoping to take a piece of the pie themselves through clever “regulation.”
The European Union, the Czech Republic, and the U.K. plan to siphon off tax revenue from big tech even though confronted by possible trade sanctions from the U.S.
The U.S. probe also will look into the digital services tax plans of Austria, Brazil, Indonesia, Italy, Spain, and Turkey because they are all looking to skim some cash off of big tech’s cash cow.
To read more about the tax fiasco, please click here.
Europe and the emerging economies have been hit harder than the U.S., not in terms of deaths, but in relative economic terms because they don’t possess the rolodex of Fortune 500 companies that can just issue more corporate debt or a Fed central bank that is delivering trillions in liquidity that has saved the stock market.
Washington has specifically been eying up France for a section 301 investigation after it became the first country to fully implement a digital sales tax in July 2019.
France has been quite aggressive in calling out big tech for undermining and exploiting their economy by not paying tax due.
French Finance Minister Bruno Le Maire has been sharp-tongued criticizing America’s big tech companies for running wild in European markets.
A 3% digital sales tax was in the cards before the U.S. slapped on a counter tariff to French goods which delayed the frosty confrontation.
Europe’s vast network of splintered resources and unbalanced innovation combined with Europe’s infamous avalanche of bureaucracy meant that developing a famous tech company fell through the cracks.
Nothing even remotely close to Silicon Valley was ever conjured up inside the confines of the European Union.
The consequences have been costly with most Europeans relying on Apple cell phones, Google software, Netflix subscriptions, and Microsoft enterprise products to get them through the day just like most Americans.
The tax grab is out of desperation as the EU confronts a post-coronavirus world where they are increasingly controlled by decisions from the Communist Chinese and subject to a graying population that delivers a reduced tax revenue base.
The European Union is one of the biggest losers from the coronavirus.
The hands-off warning by the U.S. government on its own big tech companies puts a premium on their existence to the U.S. economy.
Instead of twisting their arm to squeeze every extra tax dollar out of them, they will most likely get more access to deliver the services most Americans are hooked on.
It’s not a secret that current U.S. President Donald Trump is hellbent on destroying big tech but there is no way to do it without destroying the U.S. economy and the U.S. stock market.
At this point, just a handful of tech companies comprises over 22% of the S&P and this will most likely continue as other industries are still licking their wounds with some analysts believing it will take 10 years to get back to late 2019 economic levels.
The most likely scenario for big tech is that the array of crises has delayed real regulation indefinitely and the U.S. will protect big tech from a tax grab abroad.
The best-case scenario is zero regulation leading to zero extra costs.
Either way, stock appreciation is in the cards for tech’s future.
The end result is that big tech could eventually comprise up to 30% of the S&P in the next 3 years which dovetails nicely with a recent analyst call that Microsoft will hit over $2 trillion in market capitalization in the next 2 years.
Mad Hedge Technology Letter
June 3, 2020
Fiat Lux
Featured Trade:
(ABOUT YOUR RIOT-PROOF PORTFOLIO),
(COMPQ), (WMT), (APPL), (AMZN), (TGT), (JWN), (EQIX), (GOOGL), (MSFT)
Social unrest will have NO material effect on tech shares moving forward.
Some investors expected the Nasdaq (COMPQ) index to roll over big time, throttled by a national insurrection. Anti-police-violence protests, some becoming riots, have broken out in more than 60 cities.
However, it appears to be another false negative for the Nasdaq as it motors upwards acting on the momentum of outperformance during the coronavirus.
One thing that the coronavirus pandemic, as well as protests, have taught investors is the unwavering faith in technology’s strength will continue powering the overall market rebound.
Any social unrest will not stop tech shares because they simply don’t subtract from their revenue models.
This will perpetuate into the rest of 2020 and beyond.
Much of the public reaction from big tech has been paying some form of lip service about the national situation being untenable followed up with a small donation.
Apple (AAPL) says it's making donations to various groups including the Equal Justice Initiative, a non-profit organization based in Montgomery, Alabama that provides legal representation to marginalized communities.
To read more about big tech’s donations, click here.
Aside from some PR formalities, it will be business as usual after things settle down.
Apple might suffer some slight inconveniences of having some stores looted, but that doesn’t mean consumers can’t buy products online.
Tech companies simply contort to fit the new paradigm and that is what they are best at doing.
Apple has charged hard into the digital service as a subscription world that has served Amazon, Apple, Google (GOOGL), and Microsoft (MSFT) so well.
To read more about the robust performance of software stocks, please click here.
Many of these tech companies don’t need a physical presence to drive forward earnings, revenue models, and widen their competitive advantages.
That’s the beauty of it and their brands are so entrenched that it doesn’t matter what happens in the outside world at this point.
It’s true that a few tech companies might have to scale back or modify operations until the storm subsides but not at a great scale that will worry investors.
Amazon is reducing deliveries and changing delivery routes in some areas affected by the protests.
Big tech dodged a bullet with the majority of the financial burden falling on the shoulders of big-box retailers like Walmart (WMT) and Target (TGT) and city center-located businesses.
Walmart closed hundreds of stores one hour early on Sunday, but most are slated to reopen. Nordstrom (JWN) temporarily closed all its stores on Sunday.
Amazon (AMZN)-owned Whole Foods are often located in neighborhoods that are perceived likely to escape the bulk of the turmoil.
The events of the last few days will have significant side effects on the normalcy of society or the new normal of it.
Combined with the pandemic, consumers will opt for more spacious housing options in less concentrated areas of the U.S.
The social unrest once again delivers the goodies into the hands of e-commerce as people will be less inclined to leave their house to consume.
A stock that really sticks out during all of this is the leader in interconnected data centers Equinix (EQIX) because of the explosion of data being consumed from the stay-at-home revolution.
Sadly, the price of tech share does not account for life quality which is part of the reason we see stocks lurching higher.
By the time all the different crises, including coronavirus and protests, are snuffed out, we could be in a world where the only strong companies left are technology, "big tech".
They have an insurmountable lead at this point with guns still blazing.
When you add the windfall of trillions in cash the Fed has pumped out and unwittingly diverted into tech shares recently, it is hard to envision ANY scenario in which the Nasdaq will be down a year from now.
I am bullish on the Nasdaq index and even more bullish on big tech.
Even the supposed “rotation” to value has only meant that tech shares haven’t gone down.
A dip now in tech shares means shares dip for two hours before resurging.
Why would anyone want to sell the best and highest growth industry in the public markets with unlimited revenue-generating potential?
