Global Market Comments
December 16, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD NEWS IS OUT)
(FXI), (AAPL), (FXB), (VIX), (USO), (BABA), (NSC), (MSFT), (GOOGL)
Tag Archive for: (GOOGL)
After a China trade deal, UK election and a NAFTA 2.0 are announced, what is left to drive the stock market?
That is a very good question and explains why the Dow Average was up only a microscopic 3.33 points on Friday. It had spent much of the day down.
It’s not a pretty picture.
Not only is the market running out of drivers, the economic data is still decelerating, with the GDP running a 1.5% rate, inflation rising, and corporate earnings growth at zero, with earnings multiples at 17-year high.
A Wiley Coyote moment comes to mind.
And while we are finishing a great 27% year (56% for the Mad Hedge Fund Trader), we are in effect getting three years of performance packed into one. Not only did we pull forward a good chunk of 2020’s performance, we borrowed heavily from 2018 as well, coming in at such a low start as we did.
Thus 2019 might well get bookended by an 8% gain in 2018 and another 8% year in 2020, with dividends. Blame it all on the massive liquidity burst we got from the Fed that started last December and continues unabated.
Stocks have been floated by a tidal wave of new money creation worldwide. Globally, new money creation is running at a $1 trillion a month rate and much of that is ending up in the US stock market, especially in technology shares.
The rush was enough to drive Apple (AAPL) to a new all-time high at $275, pushing its market capitalization up to a staggering $1.2 trillion. It could surpass Saudi ARAMCO’s $2 trillion valuation in a year or two.
Steve Jobs’ creation now accounts for a mind-blowing 6% of the S&P 500 and 4% of total US stock market capitalization. It’s the best argument I’ve ever heard for becoming a hippy and dropping out of college after one quarter.
Which leads us to paint a picture for the 2020 stock market. Even the most optimistic outlook for next year, that of Ed Yardeni, is calling for only a 10% gain. Many prognostications are calling for negative numbers next year.
You might be better off parking your money in a 2% CD and taking a cruise around the world. I’ve done that before, and it works fantastically well.
You’re only going to have one shot at making money in 2020. Wait for a 10%-20% nosedive to go long. My guess is that happens when it becomes clear that the Democrats are dominating in the polls (Joe Biden is currently 14 points ahead in swing state Pennsylvania). No matter who wins, less borrowing, less spending, and higher taxes will prevail.
Then stocks will rally 10% AFTER the election because the uncertainty is gone. That will get you a 20%-30% profit in 2020, but only of you are a trader and follow the Mad Hedge Fund Trader. After basking in their own brilliance in 2019, 2020 might be a year when indexers wish they never heard of the term.
In the end, corporate earnings growth always wins, especially in tech, which is still growing at 20% a year. Remember, my 2030 forecast for the Dow Average is 125,000.
China (FXI) won big in mini trade deal. We rolled back a tariff increase that was never going to happen and the Chinese buy $50 billion worth of soybeans they were going to buy anyway, except at half the price that prevailed two years ago. All of it will come out of stockpiles built up during the trade war. Only the ag sector is affected, which is 2% of the US economy. The ag markets aren’t buying it. If this were a real trade deal, stocks would be up 1,000 points, not 89.
Conservatives won big in UK election. The British pound (FXB) is up 2% and stocks are soaring. A hard Brexit is coming, so look for Scotland to secede and Northern Ireland to join the Republic. The UK will be gone as we know it. Britain’s standard of living will plummet. Great Britain will no longer be great, and the Russians financed the whole thing.
Volatility crashed, as complacency rules supreme. Don’t buy (VIX) until we see the $11 handle again.
Chinese copper purchases hit a 13-month high, up 12.1% in November, to 483,000 metric tonnes. It explains the 78% move up in Freeport McMoRan (FCX) since October, the world’s largest producer. Obviously, someone believes a trade deal is coming. My long LEAP players love it.
US Consumer inflation expectations rebounded, up 0.1% to 2.5%, accounting to the New York Fed. That’s crawling up from a five-year low, a slightly positive economic note.
Saudi ARAMCO went public, with a 10% pop in the shares on the first two days, providing a $24 billion fund raise. This is one of the top three largest IPOs in history after Alibaba (BABA) and Softbank. It values the company at $1.88 trillion. Oil (USO) is down a dollar on the news, no longer needing artificial support to get the deal done. This could be one of the seminal shorts of our generation.
NAFTA 2.0 was signed, removing a potential negative from the market. It is 90% of the original NAFTA, not the “greatest trade deal in history” as claimed. Buy the main North/South railroad, Norfolk Southern (NSC) on the news.
Weekly Jobless Claims soared to a two-year high, by 49,000 to 252,000. Are stores laying people off from Christmas early this year, or did they never hire in the first place because the retail businesses are gone? Peak jobs are in. US job growth is now far slower than in the Obama era, as is GDP growth.
Most US companies will have fewer staff in 2020, except Mad Hedge Fund Trader. More automation and algos mean fewer humans. Only a capital spending freeze caused by the trade war kept a low of low-skilled people in their jobs.
This was a week for the Mad Hedge Trader Alert Service to catapult to new all-time highs.
My long positions have shrunk to my core (MSFT) and (GOOGL), which expire with the coming December 20 option expiration.
My Global Trading Dispatch performance ballooned to +356.00% for the past ten years, a new all-time high. My 2019 year-to-date catapulted back up to +55.86%. December stands at an outstanding +4.85% profit. My ten-year average annualized profit rebounded to +35.59%.
The coming week will be a noneventful one on the data front, with some housing data and the Q3 GDP on the menu. Anyway, everyone else will be out Christmas shopping or attending parties.
On Monday, December 16 at 9:30 AM, New York Empire State Manufacturing Index for December is out.
On Tuesday, December 17 at 9:30 AM, Housing Starts for November are released.
On Wednesday, December 18 at 11:30 AM, US EIA Crude Stocks for the previous week are announced.
On Thursday, December 19 at 8:00 AM Existing Home Sales are published. At 8:30 AM, we get Weekly Jobless Claims.
On Friday, December 20 at 9:30 AM, the final read on US Q3 GDP is printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, after blowing out 1,200 Christmas trees, the Boy Scouts will be taking down the tree lot for the year. And who do they turn to when it comes to wielding a chain saw or sledge hammer?
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
December 13, 2019
Fiat Lux
Featured Trade:
(WHY THE FANGS ARE BREAKING INTO YOUR HOME)
(GOOGL), (AAPL), (AMZN), (ALRM), (ADT), (ARLO), (RESI), (PANW), (CRWD), (FTNT), (CSCO), (CMCSA), (BBY)
The house is the new smartphone and I will tell you why.
The projected market growth of 18% in smart home technology sales according to Acumen Researching and Consulting will deliver opportunities to shape and prioritize this sector.
The revenues up for grabs from the smart home mean that internet of things’ (IoT) companies will create systems that mesh together with the bare minimum human participation, meaning that tech will have a dramatic influence in our daily lives.
I get several moans and groans a day that the Mad Hedge Technology Letter only shines the spotlight on the FANGs.
But it is hard not to when it comes to the future of the home.
Just look at recent M&A activity.
Automation and connected smart appliances have consumed Amazon by recently acquiring Eero, producer of routers for apartments, houses, and multi-story homes, and after already paying $1 billion to acquire Ring, a doorbell-camera startup. It had also bought Blink, a smart camera maker in 2017.
Google hasn’t shied away either by investing in smart home products pocketing Nest, a firm producing smart home products, for $3.2 billion.
Nest took a few years to sort out its production phase but finally managed to launch new temperature sensors, a video doorbell, and an outdoor smart camera.
What are the trending IoT products now?
The flavors of the day are smart lights, security, entertainment systems, and temperature control.
They are the low hanging fruit of the smart home industry – a de facto gateway into this world.
Most of these smart devices operate with voice assistants, but because of the nature of competition, certain products are aligned with certain ecosystems and compatibility issues will persist until the competition flushes itself out.
A layman’s example would be Apple’s Homekit dovetailing nicely with Apple’s Siri.
Companies are in the first innings of the product iteration cycle and the variations of smart home products are endless stemming from showers that remember preferred water temperature and flow rates or climate-control systems that change in real-time to suit the user.
Security of home networks and connected devices are still a controversial question mark because the receiver of this type of data has the keys to the most intimate details of personal lives.
Even avid technologists are hesitant to dive in and put up smart home products all over the house, and most are being cautious.
In fact, privacy issues are the most distinct headwind to fresh adoption rates.
Many people simply aren’t willing to make the jump yet until they are more convinced of its use case.
Even with all the reservations, an alternative global shipment company believes smart home devices will post 24% in growth next year.
For the smart home device believers, this cohort averages 6 smart home devices per household and will certainly rise to 7 or 8 by the end of 2020.
Popular items include the Amazon Echo, Google Home, and Apple (AAPL) HomePod.
Smart speakers are already present in 36% of American homes and rising.
Consumers are also worried about technology invading their daily lives along with allowing artificial intelligence to dominate personal decision making.
Others have concluded that items such as smart microwaves are a waste of money and are unneeded when analog devices function admirably.
Another legitimate reason is that the software and technology involve a perceived steep learning curve to operate which many people do not have the patience for.
And some are just burnt out by the volume of technology thrown in our faces.
Who wants to operate 50 apps on their phone to control their smart home devices when there are other pressing needs in life?
Companies with skin in the game are Alarm.com (ALRM), ADT (ADT), Arlo Technologies (ARLO) and Resideo Technologies (REZI) and they will be outsized winners if they can solve many of the industries lingering issues.
The value thesis in the case of home automation companies is that they are financially efficient, time-effective, boost wellness and will be easy to use.
About 11% of U.S. broadband households have smart thermostats and Nest’s smart thermostat is the most popular.
Networked security cameras by Arlo are in 10% of homes.
Video doorbells from Amazon.com (AMZN), Google are in 8% of homes and help deter theft of e-commerce packages.
Smart light bulbs and lighting are at 8% market share while smart door locks are at 7% penetration.
There are several second derivates bet on this as well.
The most common user interface for the smart home is apps on a smartphone or tablet and voice commands to smart speakers are second.
The conundrum of installation complexities leads to the demand of professional installers.
This demand has delivered opportunities for companies like Comcast's (CMCSA) Xfinity and Vivint.
Electronics retailer Best Buy (BBY) has stepped up its footprint in this market as well.
Another stock play would be cybersecurity companies because they will win contracts protecting the software that smart home products rely on.
Hackers are getting more sophisticated and a private cybersecurity company Firewalla can track where data is flowing to and from your devices.
Firewalla management recommends buying devices from reputable home automation companies like Amazon and Google because they have more accountability and are of higher quality.
There will be a huge onramp of cybersecurity contracts doled out to the likes of Palo Alto Networks, Inc. (PANW), CrowdStrike Holdings, Inc. (CRWD), Fortinet, Inc. (FTNT), and Cisco Systems, Inc. (CSCO).
We are in the first mile of a marathon and smart home product manufacturers, cybersecurity companies, 5G internet, and semiconductor companies will all benefit from the broad-based integration of these next-generation home consumer products.
Mad Hedge Technology Letter
December 11, 2019
Fiat Lux
Featured Trade:
(CHERRY-PICKING IN TECH TODAY)
(ZM), (CRM), (GOOGL), (AAPL)
The valedictorian of the IPO class Zoom Video Communications, Inc. (ZM) is finally on sale at a discount.
If readers want to indulge themselves in a high caliber tech growth stock to buy and hold stock, this is the one for you.
This one has no regulatory headwinds as well as an added bonus.
Zoom’s share price has dropped 40% since hitting the heights of $102 in July which was coincidentally the high for most post-IPO tech stocks of 2019.
It’s been an elevator straight down to no man’s land since then, but investors would be foolish to paint all hyper-growth companies with the same brush.
Filtering out the wheat from the chaff is critical and Zoom is the stock that still has the gloss on its outside package buttressed by its best in show video conferencing software.
There are no other proper alternatives in this sub-sector of software.
A few days ago, the stock slid 9% even though the company crushed expectations with its latest quarterly result and outlook.
Zoom generated revenue of $166.6 million representing a growth rate year on year of 85%.
The company then offered a forecast of $175 million next quarter when analysts only estimated $165 million.
Remember that this company grew 96% just 2 quarters ago and it would be illogical to believe that the stock is being penalized from faltering to 85% today.
Any tech company would give a left leg for 85% growth.
Zoom was trading at 33.5 times my calendar 2020 estimates compared to the fast growth software as a service (SaaS) median at 12.9 times.
Then software stocks started indiscriminately selling off on earnings over the past few weeks irrelevant to the quality of news because of worries to the broader bull market in tech stocks.
It’s true that tech stocks aren’t cheap now, and the skittishness rears its ugly head when bullet-proof earnings’ results are met with a cascade of selling.
Salesforce (CRM) was a software company that was penalized for pricey M&A because the company has been unable to organically grow forcing them to buy growth.
Buying growth is not necessarily a bad strategy but buying growth at this point in the economic cycle naturally means that companies will need to overpay for growth because of expensive valuations.
Zoom is perfectly positioned to outperform in the next 2-3 years.
The advancing runway is wide open with no competition in sight and a generous growth trajectory is firmly on their side.
We Company singlehandedly destroyed positive biased market momentum for any tech growth stock this summer, but on the bright side, quality post-IPO growth stocks are more reasonably priced with compelling entry points.
At around $60, Zoom looks appetizing and is a convincing buy and hold. At some point, this software company could become a takeover target for a larger corporate because companies such as Google (GOOGL) and Apple (AAPL) will need to acquire growth moving forward.
I am impressed with Zoom's superior products, growth prospects, and scalable business model, and the stock’s near-term risk/reward trade-off is attractive after the 9% haircut this past week.
There is an actionable and manageable clear path to a $2 billion revenue run rate with strong margin expansion potential and with its flagship product growing around 80-90%, its next growth driver in Zoom Phone could translate well into a meaningful revenue stream.
Zoom Phone is the next springboard to further success for this company.
Anyone that has used Zoom as a product can confirm the veracity of its superior performance standards.
This isn’t the type of stock to trade short-term, the volatility undermines any potential entry points.
If the broader market holds up in 2020, and Zoom isn’t a $100 stock by yearend, then the stars should align by 2021 because the value extraction potential is substantially robust in Zoom’s business model.
We finally have a reasonable level to scale into Zoom, and if it drops into the $50 range, it’s not just a scale-in type of scenario, investors should buy as much as they can with two hands.
Growth stocks can only be pinned down for so long and the best and brightest have been unfairly penalized with the rest. And let me remind you, this patch of softness in shares is only ephemeral and now is the time to act.
Global Market Comments
December 10, 2019
Fiat Lux
Featured Trade:
(MAD HEDGE FUND TRADER ANNOUNCES STRATEGIC PARTNERSHIP WITH TASTYTRADE),
(A NOTE ON OPTIONS CALLED AWAY),
(MSFT), (TLT), (BA), (GOOGL), (SPY)
Global Market Comments
December 2, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or 2020 IS ALREADY HAPPENING),
(TSLA), (X), (GE), (FCX), (SLB), (GOOGL), (MSFT), (GLD)
You know the melt-up that is going on in the stock market right now? That is your 2020 performance being pulled forward.
One thing I have noticed over the past half-century of trading is that when market participants agree on a direction, it gets accelerated. Once the traditional October selloff failed to show, it was pedal to the metal to achieve new all-time highs.
Traders have become so overconfident that they have already completed this year’s performance and are now working on next year's. They are in effect pulling performance forward from 2020.
This historic run is taking place in the face of year-on-year earnings growth that is zero. ALL of the 29% price appreciation in the S&P 500 (SPY) in 2019 has been due to multiple expansion, from 14 times earnings to 19 times, a 20-year high. Market multiples rising by 50% anytime is almost unprecedented in history. I can only recall that happening twice: in 1929 and 1999.
So, that leaves only two possibilities for 2020. Either the multiple rises to a new 20-year multiple high, say to 20, 21, or 22, or the stock market goes down.
With a trade war-induced global economic slowdown still unfolding, don’t expect any respite from a sudden earnings recovery. Enjoy 2019 because the more we go up now means the more we will go down in 2020.
Were you waiting for the euphoria to make a market top? This is it. Sharply rising markets in the face of sharply falling earnings can only end in tears.
Needless to say, risk in the stock market is very high right now.
Jay Powell gave the market another boost, promising to hit the Fed’s 2% inflation target, giving plenty of room for wage hikes. The last inflation reading was 1.7% YOY. He might as well have said Dow 29,000 by yearend. I wish it were always this easy.
Hong Kong stalled the rally with the passage of a pro-democracy support by congress, with sanctions. China is warning of “firm countermeasures.” That throws cold water on any trade deal for 2019. New all-time highs for stocks may have to take a vacation.
US Q3 GDP was revised up to 2.1%, an improvement of 0.2% from the last read. The trade war seems to be costing us 1% of growth a year or about one-third of the total. That’s why we’re getting such a strong stock market move on the possibility of a trade deal. No-deal means lookout below.
Durable Goods came in at 0.6% in October, a nine-month high and better than expected. What does this week’s spate of positive data means, the first in many months? Is the recession risk over? If so, how much is already in the price?
Stocks love a steepening yield curve, with long term interest rates rising faster than short term ones. It puts the recession talk on hold, if not in abeyance.
It’s time to go dumpster diving, as the upside breakout in the Russell 2000 demonstrated last week. So, it’s time to start looking at the forlorn and the ignored of this bull market, like US Steel (X), General Electric (GE), Freeport McMoRan (FCX), and Schlumberger (SLB). There are no fundamentals in any of these names, they’ve just been down for so long anything looks like up from here. The liquidity-driven bull market has to find some fresh meat to rotate into, even temporarily, or it will die.
S&P Case Shiller rose 3.2% in September, the third consecutive month of price increases. Only San Francisco is showing falling prices. Phoenix (6.0%), Charlotte (4.6%), and Tampa (4.5%) are showing the greatest prices rises. Only a shortage of inventory is preventing prices from rising faster, now at a record low of 3.9 months. The builders who went under ten years ago aren’t building anymore.
New Home Sales drop 0.7%, in October, but are still up a massive 31.6% YOY. Sales in the northeast and south plunged, while those in the Midwest and west rise. The seasonally adjusted annual rate is 733,000 units. The Median Home Price fell 3.6% to $316,700. A 30-year fixed-rate mortgage at 3.66% is a major factor.
Merger mania in drug land continues, with the Novartis takeover of The Medicines Co. for $9.7 billion. It wants to take on Amgen (AMGN), Regeneron (REGN), and Sanofi in the heart drug space. No wonder this is the top-performing sector since I launched the Mad Hedge Biotech and Healthcare Letter.
Tesla shattered, both windows and sales records with an incredible 250,000 cyber trucks sold in a week. It’s one of the largest consumer orders in history, second only to the Tesla Model 3 launch four years ago. I may get one myself to make the Lake Tahoe run on a single 500-mile charge. Keep buying (TSLA) on dips. It is the clearest ten bagger out there.
Who is the mystery gold (GLD) buyer? Someone made a massive bet in the options market that gold will rise above $4,000 an ounce in 18 months. It would take a 32% move just to get gold back to its old $1,927 high. If the trade war continues, we may get it.
This was a week for the Mad Hedge Trader Alert Service to burst upon new all-time highs. I know this sounds boring, but I made all the money long technology stocks. This is net a -2.16% loss on my short position in Tesla (TSLA). If I’d only held on two more days this would have been a big winner over the disappointment over the shocking Cyber truck design. My long positions have shrunk to my core (MSFT) and (GOOGL).
By the way, running out of positions at a market top is a good thing.
My Global Trading Dispatch performance held steady at +352.76% for the past ten years, pennies short of an all-time high. My 2019 year-to-date catapulted back up to +52.62%. We closed out November with a respectable +3.07% profit. My ten-year average annualized profit ground back up to +35.28%.
The coming week will be hot with the jobs data trifecta.
On Monday, December 2 at 8:00 AM, the ISM Manufacturing PMI for November is out.
On Tuesday, December 3 at 2:30 PM, the API Crude Oil Stocks are announced.
On Wednesday, December 4, at 6:15 AM, the private sector ADP Employment Report is published.
On Thursday, December 5 at 8:30 AM, the Weekly Jobless Claims are printed.
On Friday, December 6 at 8:30 AM, the November Nonfarm Payroll Report is released.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I am going to battle my way through the blizzards at Donner Pass this weekend to get back to the San Francisco Bay Area. There, I’ll be helping the local Boy Scout troop to set up their Christmas tree lot. The enterprise helps finance all the camping trips for the coming year.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
December 2, 2019
Fiat Lux
Featured Trade:
(THE DRONE WARS HAVE STARTED),
(DJI), (AMZN), (WMT), (UBER), (GOOGL), (FDX), (UPS)