Mad Hedge Technology Letter
November 20, 2019
Fiat Lux
Featured Trade:
(MY CURRENT TECHNOLOGY TRADING STRATEGY),
(GOOGL), (MSFT), (APPL), (ADBE), (AKAM), (VEEV), (FTNT), (WKDAY), (TTD)
Tag Archive for: (GOOGL)
Some might say that we were due for a revaluation of growth tech stocks.
They have contributed greatly in this nine-year bull market.
Profit-generating software stocks are the order of the day.
Tech has led the overall market higher after projected quarterly earnings growth of -9% came in better than expected at -5%.
We have ebbed and flowed from pricing in a full-out recession in mid-2020 to now believing a recession is further off than first thought.
The pendulum swing ruptured many growth stocks from Workday (WKDAY) to The Trade Desk, Inc. (TTD) plummeting 30%.
We have retraced some of those losses but momentum in share appreciation has shifted to the perceived safer variation of tech stocks.
Investors have cut volatility and headed into bulletproof companies of Apple (AAPL), Google (GOOGL), and Microsoft (MSFT).
These companies have significant competitive advantages, Teflon balance sheets, and print money.
The tech markets just about priced in the U.S - China trade war in the fall as broad-based volatility plummeted because of optimism around making a deal.
This, in turn, has boosted chips stocks along with investors front running the 5G revolution and the administration granting Huawei a reprieve was a cherry on top.
The Mad Hedge Technology Letter has taken every dip to initiate new longs in safe trades like software companies Adobe (ADBE) and Veeva Systems (VEEV).
Tech is at the point that all loss-making companies are out of the running for tech alerts because the moment there is a recession scare, these shares drop 10% and often don’t stop until they lose 30%.
Now there is a deeply embedded set of narrow tech leadership by a few dominant tech companies buttressed by a select set of second-tier software stocks.
I would put PayPal (PYPL) and Twitter (TWTR), which I currently have open trades on, in the ranks of the second tier and they should do well as long as economic growth does better than expected.
Their share prices dipped on weak guidance and the bad news appears to have been shaken out of these names.
Professional investors could also be hanging on to meet end-of-year performance targets.
I do expect unique entry points on software stocks that drop after bad future guidance.
Profitability has moved to the fore as the biggest factor in holding a name or not.
Newly minted IPOs have fared even worse showing the markets' waning appetite for loss makers like Uber (UBER) and Lyft (LYFT).
Loss-making companies often tout their ability to change the world and disrupt industry, but that has been discovered as nothing more than a ruse.
They aren’t disrupting the way we change the world. For example, Uber is a dressed-up taxi service and the new CEO has failed to create any new momentum in the unit economics that spectacularly fail by any type of metric.
Even worse for these growth stocks, as the economy starts to falter, there will be even less appetite for them, and even more appetite for safer tech stocks.
A worst-case scenario would see Uber drop to $10 and Lyft to $20.
New all-time highs have crystalized with Google (GOOGL) under the gauntlet of regulation hysteria displaying the domination of these big tech machines.
The ongoing, consistent rotation out of growth and into value hasn’t run its course yet and fortunately, by identifying this important trend, our readers will be well placed to advantageously position themselves going into 2020.
Growth stocks won’t make a comeback anytime soon and deteriorating conditions could trigger renewed synchronized global monetary policy easing and central bank stimulus.
And yes, more negative rates.
I believe Oracle (ORCL), Fortinet (FTNT), Akamai Technologies, Inc. (AKAM) could weather the storm next year.
Tech growth is slowing and trade uncertainty is high, and readers must have a sense of urgency to avoid the losers in this scenario.
U.S. economic growth could slow to 1.3% next year, avoiding a recession, and the lack of enterprise spend will reduce software sales and combine that with peak smartphone growth and it won’t be smooth sailing.
The Mad Hedge Technology Letter has the pulse of the tech market and will show you how to navigate this minefield.
Mad Hedge Technology Letter
November 18, 2019
Fiat Lux
Featured Trade:
(THE FANG’S BIG MOVE INTO BANKING),
(GOOGL), (MSFT), (APPL), (MA), (V), (PYPL), (SQ), (GS), (FB)
First, Apple (APPL) collaborates with Goldman Sachs’ (GS) offering of a credit card even giving credit access to subprime borrowers.
And now Google (GOOGL) has its eyes on the banking industry — specifically, it’ll soon offer checking accounts.
In a copycat league where anything and everything is fair game, we are seeing a huge influx of big tech companies vie for the digital wallets of Americans.
The project is aptly named Cache and accounts will be handled by Citibank (C) and a credit union at Stanford.
Google’s spokesman shared with us admitting that Google hopes to “partner deeply with banks and the financial system,” and further added, “If we can help more people do more stuff in a digital way online, it’s good for the internet and good for us.”
I would disagree with the marginal statement that it would be good for us.
Facebook (FB) is now offering a Pay option and how long will it be until Amazon (AMZN), Microsoft (MSFT), and others throw their name into the banking mix.
I believe there will be some monumental failures because it appears that these tech companies won’t offer anything that current bank intuitions aren’t offering already.
Moving forward, the odd that digital banking products will become saturated quickly is high.
Let’s cut to the chase, this is a pure data grab, and not in the vein of offering innovative services that force the consumer down a revolutionary product experience.
As the consumer starts to smarten up, will they happily reveal every single data point possible to these tech companies?
Big tech continues to be adamant that personal data is secure with them, but their track records are pitiful.
Even if Google doesn’t sell “individual data”, there are easy workarounds by just slapping number tags on aggregated data, then aggregated data can be reverse-engineered by extracting specific data with number tags.
The cracks have already started to surface, Co-Founder of Apple Steve Wozniak has already claimed that the credit algorithm for Apple’s Goldman Sach’s credit card is sexist and flawed.
Time is ticking until the first mass data theft as well and let me add that the result of this is usually a slap on the wrist incentivizing bad behavior.
I believe big tech companies should be banned from issuing banking products.
Only 4% of consumers switched banks last year, and a 2017 survey by Bankrate shows that the average American adult keeps the same checking account for around 16 years.
As anti-trust regulation starts to gather more steam, I envision lawmakers snuffing out any and every attempt for big tech to diversify into fintech.
It’s fair to say that Google should have done this 10 years ago when the regulatory issues were nonexistent.
Now they have regulators breathing down their necks.
Let me remind readers that the reason why Facebook abandoned their digital currency Libra was because of the pressure lawmakers applied to every company interesting in working with Facebook’s Libra.
Lawmakers threatened Visa and Mastercard that they would investigate every part of their business, including the parts that have nothing to do with Facebook’s Libra, if they went ahead with the Libra project.
The most telling insight comes from the best tech company Microsoft who has raised the bar in terms of protecting their reputation on data and trust.
They decided to stay away from financial products like the black plague.
Better to stay in their lane than take wild shots that incur unneeded high risks.
When U.S. Senator Mark Warner, a Democrat on the Senate panel that oversees banking, was asked about Google and banking, he quipped, “There ought to be very strict scrutiny.”
Big tech is now on the verge of getting ferociously regulated and that could turn out positive for the big American banks, PayPal (PYPL), Visa (V), Mastercard (MA) and Square (SQ).
I heavily doubt that Google will turn Cache into a meaningful business unless Google offers some jaw-dropping interest rates or elevated points to move the needle.
Google has canceled weekly all-hands meetings because of the tension between staff members and Facebook is also just as dysfunctional at the employee level.
Whoever said it's easy to manage a high-stake, too-big-to-fail tech firm?
Even with all the negativity, Google is still a cash cow and if regulatory headwinds are 2-3 years off, they are a buy and hold until they are not.
The recent tech rally, after the rotation to value, has seen investors flood into Apple, Microsoft, and Google as de-facto safe haven tech plays.
Mad Hedge Technology Letter
November 13, 2019
Fiat Lux
Featured Trade:
(WHY YOUR NEXT TAXI RIDE COULD BE BY AIR),
(UBER), (TSLA), (GOOGL)
San Francisco is 49.2 square miles of pure innovation – at least historically.
The most creative solutions to the world’s most complex problems have been generated from this diminutive peninsula that juts out into the Pacific Ocean.
But when it comes to transportation, and by that, I mean the public transportation efficiently operated in most European and Asian cities like Seoul, Korea and Frankfurt, Germany, San Francisco epically fails at delivering an adequate system to the masses.
Instead, the stopgap solution gave us Uber (UBER), the rideshare company, and the fall out is more cars clogging up a bigger portion of the roadways and bridges.
And then there is Tesla (TSLA), whose enigmatic CEO loves to tell investors that electric is the panacea to the world’s economy.
Is Silicon Valley that far off from solving the conundrum of smooth public transportation by applying technology?
The solution might be percolating in Wessling, Germany by a company named Lilium who developed the Lilium Jet, an electrically powered commuter aircraft capable of vertical taking off and landing (VTOL) flight.
Moving forward, it’s black and white that the answer is 3D and not 2D.
Lilium was founded in 2015 by four engineers and PhD students at the Technical University of Munich.
In 2017, The Lilium Eagle, an unmanned two-seat proof of concept model, performed its initial flight at the airfield Mindelheim-Mattsies near Munich, Germany.
The successful test led the company to launch the 5-seat Lilium Jet and they hope by 2025, to roll out a full-fledged aerial taxi service.
Co-Founder and CEO Daniel Wiegand swears that within five years, a fleet of them could offer a 10-minute trip from Manhattan to Kennedy International Airport for $70.
Expectations that aerial taxis will be a reality in the coming years are quickly skyrocketing.
Companies like Lilium are researching, testing, and laying the groundwork for wider production and hankering for support from government officials.
At least 20 companies have skin in the game, which Morgan Stanley estimates will become a $850 billion market by 2040.
Larry Page, the billionaire co-founder of Google (GOOGL), is financially buttressing Kitty Hawk, a Palo Alto company run by the first engineers on Google’s autonomous car.
Uber is developing an air taxi service, with plans to operate by 2023, but I highly doubt that investors would give the go ahead if the cash burn overwhelms them.
The Federal Aviation Administration (FAA) is another tripwire that could knock the 2025 schedule off kilter and their notorious bureaucratic ways do not infuse certainty into the project.
Can Lilium build a platform that is broadly accessible and efficient?
That answer will be unpacked in the next few years.
The aerial vehicle has a carbon fiber body, 36-foot wingspan, and is battery powered, providing a range of 186 miles and a top speed of nearly 190 mph.
Inside the oblong-shaped cabin, posh seats await four passengers and a pilot.
The aircraft can take off and land vertically like a helicopter and is even quieter than a helicopter.
Once scaled out, production costs will run in the several hundred thousand dollars for each aircraft-making profitability realistic.
There will be lower maintenance costs because there are fewer mechanical components, and rides should cost less than Uber.
If rolled out on a mass scale, cityscapes will be revolutionized.
San Francisco and California effectively could bypass proper land public transport and skip straight to aerial vehicles as taxis.
Lilium’s plane has packed 36 smaller engines in its rotating wings that act as thrusters for takeoffs, landings, and subtle movements forward and back. Encasing the engines in the wings reduces friction and noise.
Lilium’s performance is currently unmatched but its secretive nature of the technology means it’s hard to quantify where they are now in the development.
With the funneling of capital to solve global transportation issues, aerial aspects will definitely be intertwined into the solution.
The race is on to capture the first-mover advantage and my bet it will be Lilium.
Mad Hedge Technology Letter
November 4, 2019
Fiat Lux
Featured Trade:
(THE CHICKENS COME HOME TO ROOST WITH SMALL TECH),
(AAPL), (MSFT), (AMZN), (GOOGL), (WDC), (TXI), (ANET), (PINS)
The tech story is still intact, but the edges are losing its shine.
That is the takeaway from the recent slew of earnings reports from many of the prominent yet second-tier tech companies.
On one hand, companies like Apple (AAPL) have been holding the fort as it blasts through to new highs even amid the backdrop of the Chinese trade war that has dragged many of the strong tech names into the mud.
What we did see lately was a magnificent swan dive by chip names like Western Digital (WDC) and Texas Instruments (TXI) which were blindsided by 10-15% haircuts because of lackluster guidance.
The agony didn’t stop there with second rate cloud names like Pinterest (PINS) and Arista Networks, Inc. (ANET) reaching for scapegoats for their weak guidance. These took instant 20% haircuts.
The problem with smaller stocks like these besides having narrower spreads, they are slaves to just a few contracts and when one goes, their guidance and revenue estimates implode in their faces.
Arista slid more than 25% on news that they expect quarterly revenue of $540 million-$560 million, with the midpoint about 20% below the previous Street consensus at $686.2 million.
Arista CEO Jayshree Ullal said in a statement that the company expects “a sudden softening in Q4 with a specific cloud titan customer.”
That is Facebook who comprise about 10% of Arista’s revenue composition because Facebook has pulled back the reigns on cloud spend to cut costs amid a murky global backdrop and regulatory minefield.
Unfortunately, second tier cloud names must accept that they do not offer the best pricing when directly competing with the superior cloud names of Google Cloud, Microsoft Azure, and Amazon Web Services (AWS) because they simply can’t scale as well to the extent these monopolistic FANGs can.
Data storage often comes down to whoever has the cheapest cost of capital to pile into server farms allowing pricing to be ultra-cheap and these three companies win out.
If these firms lose one contract like Walmart’s switch over to Microsoft Azure from Amazon, it’s not a big deal.
It doesn’t put a 10% black hole in the revenue stream like for Arista.
Pinterest was one of the most overhyped IPOs of 2019 promising growth, growth and more growth.
Its digital ad business needs to deliver accelerating growth for its share price to rise and when the latest earnings report showed year-over-year growth slow from 62% to 47%, investors saw the writing on the wall.
The company only grew its users 8% in the lucrative North American market and 38% abroad.
But the foreign markets were tainted by the gruesome underbelly of earning only 13 cents per foreign users.
There is user growth but at the cost of an inferior quality of growth.
Analysts can clearly observe the accelerated erosion of Pinterest, and I can say from a personal point of view that the website isn’t that useful.
Management’s excuse was a tough comparison to the prior year but if a growth firm has a superior model, they should be able to grow past any minor problems if the secular trends stay hemmed in.
Weak excuses now and probably weak excuses next quarter as the global tech landscape gets squeezed even more at the periphery.
What does this all mean?
There has been a flight to tech quality into the Teflon names like Microsoft and Apple.
Names that are showing growth headaches saddled with too much competition and structural softness are getting killed.
Don’t even think about investing in the marginal names like Pinterest and Arista.
Better to be safe on your perch inside the moat than outside isolated from the drawbridge.
Not all tech is created equal and it's rearing its ugly face in a frothy market.
Global Market Comments
November 1, 2019
Fiat Lux
Featured Trade:
(OCTOBER 30 BIWEEKLY STRATEGY WEBINAR Q&A),
(SQ), (CCI), (SPG), (PGE), (BA), (MSFT), (GOOGL), (FB), (AAPL), (IBB), (XLV), (USO), (GM), (VNQ)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 30 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Would you buy Square (SQ) around here?
A: I don’t want to buy anything around here—that’s why I’m 90% cash. Would I buy Square on a market selloff? Absolutely, it's one of our favorite fintech stocks for the long term. The fintech stocks are eating the lunch of the legacy banks at an accelerating rate.
Q: What's the best yield play currently, now that bonds have gone so high?
A: High-quality REITs—especially cell tower REITs. We’re going to get a significant increase in the number of cell towers, thanks to 5G, and there are REITs specifically dedicated to cell phone towers. An example is Crown Castle (CCI), which has a generous 3.45% dividend yield. The worst REITs are the mall-based like Simon Property Group (SPG).
Q: PG&E (PGE) has just had a huge selloff of 50%. Should I buy it now or is it a potential zero?
A: I wouldn’t touch PG&E at all—They’re already in bankruptcy, and they are now accepting responsibility for starting another eight fires this week, including the big Kincaid fires. You could have the state government take over the company and wipe out all the shareholders— the liabilities are just growing by the second, so I would turn my attention elsewhere. Don’t reach for new ways to get in trouble.
Q: Regarding Boeing (BA), it looks like you caught the bottom on the last dip—should I buy it here or wait for another dip?
A: Wait for another dip. The company seems to have an endless supply of bad news. That said, if we visit $325 a share one more time, I would buy it again. We caught about a $10 dollar move in Boeing to the upside. Keep buying the dips. The bad news story on this is almost over.
Q: Do you think the earnings season will be better than expected? If so, which sectors do you think will outperform?
A: It’s always better than expected because they always downgrade right before earnings, so everything is a surprise to the upside. Some 80% of all stocks surprise to the upside every quarter. And what would I be buying on dips? Big Tech. Especially things like Apple (AAPL), Facebook (FB), Alphabet (GOOGL), and Microsoft (MSFT) —that is where the only reliable longer-term growth is in the economy. If you want to buy cheap companies on dips, go for Biotech (IBB) and Health Care (XLV), which have gone up almost every day since we launched the Biotech letter a month ago. To subscribe to the Mad Hedge Biotech and Healthcare Letter, please click here.
Q: What does it mean that the Chile APEC summit is cancelled? What is Trump going to do now for signing on the trade deal?
A: There may not be a trade deal. It's another postponement and could be another trigger for a long-overdue selloff in the market. We've basically been going up nonstop now for 2½ months, and almost everyone's market timing indicators are saying extreme overbought territory here, including ours.
Q: Will there be a replay of this webinar posted?
A: Yes, we always post these on the website a couple of hours after it airs. Some 95% of our viewers watch the recordings, especially those overseas in weird time zones like Australia and India. You need to be logged in to access it. Just go to www.madhedgefundtrader.com, log in, go to My Account, then Global Trading Dispatch, then click on the Webinars button. It’s there in all its glory.
Q: Does Invesco DB US Dollar Index Bullish Fund ETF (UUP) make sense (the dollar basket)?
A: No, I'm staying out of the currency market because there are no clear trends right now and there are much clearer trends in other asset classes, like stock and bonds.
Q: How do you see General Electric (GE)?
A: There are a lot of people shouting accounting fraud like Harry Markopolos, the whistleblower on Bernie Madoff. Sure, they had a good today, up a buck, but their problems are going to take a long time to fix. So, don't think of this as a trading vehicle, but rather a long-term investment vehicle.
Q: Could the Saudi Aramco IPO push the price of oil up?
A: You can bet they're going to do everything humanly possible to get the price of oil (USO) up and to get this IPO off their hands—that's why you shouldn't buy the IPO. The Saudis are desperate to get out of the oil business before prices go to zero and are pouring money into alternative energy and technology through Masayoshi Son’s Vision Fund. When you have the chief supplier of oil rigging the price, you don’t want to be anywhere near the distributor and that’s Saudi Aramco.
Q: What about selling the (SPG) (Simon Property) REIT?
A: It’s kind of too late to sell, but what you might think of doing is selling short just one deep out-of-the-money put, just to bring in a small amount of income. These things don’t crash, they grind down; so, it could be a good naked put shorting situation, but only on a very small scale. If you want to play REITs on the long side, look at the Vanguard Real Estate ETF (VNQ), which pays a handy 3.12% dividend. Guess what its largest holdings are? 5G cell tower REITs.
Q: Is General Motors (GM) a buy on the union detent?
A: Only for a trade, but not much; the auto industry is the last thing you want to buy into going into a recession, even just a growth recession.
Q: Have we topped out on Apple (AAPL) for the year at $250?
A: If we did, it’s probably just short term. Remember their 5G phone is coming out next September and I expect the stock to go to $300 dollars just off of that. Any dips in Apple won’t last more than a month or two.
Q: Could we get another leg up for the end of the year?
A: Yes, not much, maybe another 5% from here, and I wouldn't do that until we get another 5% drop in the market first which should happen sometime in November. If that happens, then you’ll have a shot at making another 10% by the end of the year, which is exactly what I plan on doing for myself. That would take our 2019 performance from 50% to 60%.
Q: Is the Fed’s printing infinite money going to lead to runaway inflation crashing the value of the dollar?
A: Yes, but it may take us a couple of years to get to that point. So far, no sign of inflation, except inflation of things you want to buy, like healthcare, a college education, and so on. For anything you want to sell, like your labor or service, the prices are collapsing. That’s the new inflation, the type that screws you the most.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
