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The Market Outlook for the Week Ahead, or The Bad Omens are There

The Omens are there.

I am normally a pretty positive guy.

But I was having a beer at Schwarzee at the base of the Matterhorn the other day, just having completed the climb up to the Hornli Hut at 10,758 feet. I carefully watched with my binoculars three helicopters circle the summit of the mountain, around the Solvay Hut.

These were not sightseeing tours. The pilots were taking great risks to retrieve bodies.

I learned at the Bergfuhrerverein Zermatt the next day that one of their men was taking up an American client to the summit. The man reached for a handhold and the rock broke loose, taking both men to their deaths. The Mountain Guide Service of Zermatt is a lot like the US Marine Corps. They always retrieve their dead.

It is an accident that could have happened to anyone. I have been over that route many times. If there was ever an omen of trouble to come, this was it.

The markets are sending out a few foreboding warnings of their own. Friday’s Q2 GDP report came in at a better than expected 2.1%, versus 3.1% in Q1.

Yet the Dow Average was up only a meager 51.47 points when it should have gained 500. It is an old market nostrum that if markets can’t rally on good news, you get the hell out of Dodge. Zermatt too.

It is the slowest US growth in two years. The trade war gets the blame, with falling exports offsetting healthy consumer spending. With the $1.5 trillion tax cut now spent, nothing is left but the debt. 2020 recession fears are running rampant, so paying all-time highs for stock prices is not a great idea.

You might be celebrating last week’s budget deal which heads off a September government shutdown. But it boosts the national debt from $22 to $24 trillion, or $72,000 per American. As with everything else with this administration, a short-term gain is achieved at a very high long-term cost.

Boris Johnson, the pro-Brexit activist, was named UK prime minister. It virtually guarantees a recession there and will act as an additional drag on the US economy. Global businesses will accelerate their departure from London to Paris and Berlin.

The end result may be a disunited kingdom, with Scotland declaring independence in order to stay in the EC, and Northern Ireland splitting off to create a united emerald island. The stock market there will crater and the pound (FXB) will go to parity against the greenback.

The European economy is already in a downward spiral, with German economic data flat on its back. GDP growth has shrunk from 2.0% to 0.7%. It seems we are not buying enough Mercedes, BMWs, and Volkswagens.

Yields on ten-year German bunds hit close to an all-time low at -0.39%. The Euro (FXE) is looking at a breakdown through parity. The country’s largest financial institution, Deutsche Bank, is about to go under. No one here wants to touch equities there. It’s all about finding more bonds.

Soaring Chip Stocks took NASDAQ to new high. I have to admit I missed this one, not expecting a recovery until the China trade war ended. Chip prices are still falling, and volume is shrinking. We still love (AMD), (MU), and (NVDA) long term as obviously do current buyers.

Existing Home Sales fell off a cliff, down 1.7% in June to a seasonally adjusted 5.27 million units. Median Home Prices jumped 4.7% to $287,400. A shortage of entry-level units at decent prices get the blame. Ultra-low interest rates are having no impact.

JP Morgan (JPM) expects stocks to dive in Q3, driven by earnings downgrades for 2020. Who am I to argue with Jamie Diamond? Don’t lose what you made in H1 chasing rich stocks in H2. Everyone I know is bailing on the market and I am 100% cash going into this week’s Fed meeting up 18.33% year-to-date. I made 3.06% in July in only two weeks.

Alphabet (GOOGL) beat big time, sending the shares up 8% in aftermarket trading. Q2 revenues soared 19% YOY to an eye-popping $39.7 billion. It’s the biggest gain in the stock in four years, to $1,226. The laggard FANG finally catches up. The weak first quarter is now long forgotten.

Amazon (AMZN) delivered a rare miss, as heavy investment spending on more market share offset sales growth, taking the shares down 1%. Amazon Prime membership now tops 100 million. Q3 is also looking weak.

Intel (INTC) surged on chip stockpiling, taking the stock up 5% to $54.70. Customers in China stockpiled chips ahead of a worsening trade war. Q3 forecasts are looking even better. Sale of its 5G modem chip business to Apple is seen as a huge positive.

I've finally headed home, after a peripatetic six-week, 18-flight trip around the world meeting clients. I bailed on the continent just in time to escape a record heatwave, with Paris hitting 105 degrees and London 101, where it was so hot that people were passing out on the non-air conditioned underground.

Avoid energy stocks. The outcry over global warming is about to get very loud. I’ll write a more detailed report on the trip when I get a break in the market.

My strategy of avoiding stocks and only investing in weak dollar plays like bonds (TLT), foreign exchange (FXA), and copper (FCX) performed well. After spending a few weeks out of the market, it’s amazing how clear things become. The clouds lift and the fog disperses.

My Global Trading Dispatch has hit a new high for the year at +18.33% and has earned a robust 3.09% so far in July. Nothing like coming out of the blocks for an uncertain H2 on a hot streak. I’m inclined to stay in cash until the Fed interest rate decision on Wednesday.

My ten-year average annualized profit bobbed up to +33.23%. With the markets now in the process of peaking out for the short term, I am now 100% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter. If there is one thing supporting the market now, it is the fact that my Mad Hedge Market Timing Index has pulled back to a neutral 60. It’s a Goldilocks level, not too hot and not too cold.

The coming week will be a big one on the data front, with one big bombshell on Wednesday and the Payroll data on Friday.

On Monday, July 29, the Dallas Fed Manufacturing Index is out.

On Tuesday, July 30, we get June Pending Home Sales. A new Case Shiller S&P National Home Price Index is published. Look for YOY gains to shrink.

On Wednesday, July 31, at 8:30 AM, learn the ADP Private Employment Report. At 2:00 PM, the Fed interest rate decision is released and an extended press conference follows. If they don’t cut rates, there will be hell to pay.

On Thursday, August 1 at 8:30 AM, the Weekly Jobless Claims are printed.

On Friday, August 2 at 8:30 AM, we get the July Nonfarm Payroll Report. Recent numbers have been hot so that is likely to continue.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, by the time you read this, I will have walked the 25 minutes from my Alpine chalet down to the Zermatt Bahnhoff, ridden the picturesque cog railway down to Brig, and picked up an express train through the 12-mile long Simplon Tunnel to Milan, Italy.

Then I’ll spend the rest of the weekend winging my way home to San Francisco in cramped conditions on Air Italy. Yes, I had to get a few more cappuccinos and a good Italian dinner before coming home.

Now, on with the task of doubling my performance by yearend.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

July 24, 2019

Tech Letter

Mad Hedge Technology Letter
July 24, 2019
Fiat Lux

Featured Trade:

(CIAO SILICON VALLEY),
(AAPL), (CRM), (MSFT), (FB), (AMZN), (GOOGL)

Ciao Silicon Valley

Tech Letter

Bridgewater Associates Founder Ray Dalio carefully articulates an economic landscape in which the unrelenting chase for short-term tech profits finally catches up meaningfully with the gyrations of tech shares.

All of this could come home to roost and the early manifestations can be found in the housing migratory trends.

The robust housing demand, lack of housing supply, mixed with the avalanche of inquisitive tech money will propel these housing markets to new heights and this phenomenon is happening as we speak.

Salesforce Founder and CEO Marc Benioff has lamented that San Francisco, where ironically he is from, is a diabolical “train wreck” and urged fellow tech CEOs to “walk down the street” and see it with their own eyes to observe the numerous homeless encampments dotted around the city limits.

The leader of Salesforce doesn’t mince his words when he talks and beelines to the heart of the issues.

After relinquishing some of his CEO duties to newly anointed Co-CEO Keith Block, Benioff will have the operational time and a wealth of resources to get on top of the pulse of not only tech issues but bigger picture stuff and he now has a mouthpiece for it with Time Magazine which he and his wife recently bought.

In condemning large swaths of the beneficiaries of the Silicon Valley ethos, he has signaled that it won’t be smooth sailing forever.

In tech wonderland, and he urged companies to transform their business model if they are irresponsible with user data.

The tech lash could get messier this year because companies that go rogue with personal data will face a cringeworthy reckoning as the techlash fury seeps into government policy and the social stigma worsens.

I have walked around the streets of San Francisco myself.

Places around Powell Bart station close to the Tenderloin district are eyesores littered with used syringes that lay in the gutter.

South of Market Street isn’t a place I would want to barbecue on a terrace either.

Summing it up, the unlimited tech talent reservoir that Silicon Valley gorged on isn’t flowing anymore because people don’t want to live there now.

This tech talent, equipped with heart-tugging stories from siblings and anecdotes from classmates getting shafted by the San Francisco dream, has recently put the Bay Area in the rear-view mirror for many who would have stayed if it were 20 years ago.

This is exactly what Apple’s $1 billion investment into a new tech campus in Austin, Texas and Amazon adding 500 employees in Nashville, Tennessee are all about.

Apple also added numbers in San Diego, Atlanta, Culver City, and Boulder just to name a few.

Apple currently employs 90,000 people in 50 states and is in the works to create 20,000 more jobs in the US by 2023.

Most of these new jobs won’t be in Silicon Valley.

Since the tech talent isn’t giddy-upping into Silicon Valley anymore, tech firms must get off their saddle and go find them.

The tables have turned but that is what happens when the heart of western tech becomes unlivable to the average tech worker earning $150,000 per year.

Driving out young people who envision a long-term future elsewhere than the San Francisco Bay Area forces Silicon Valley to adapt to the new patterns revealing themselves.

Sacramento has experienced a dizzying rise of newcomers from the Bay Area itself.

Some are even commuting, making that 60-mile jaunt past Davis, but that will give way to entire tech operations moving to the state capitol.

Millennials are reaching that age of family formation and they are fleeing to places that are affordable and possible to become a new home buyer.

These are some of the practical issues that tech has failed to embrace and to maintain the furious pace of growth that investors' capricious expectations harbor.

Silicon Valley will have to become more practical adding a dash of empathy as well instead of just going by the raw and heartless data.

We aren’t robots yet, and much of the world still augurs to emotional decisions and disregards the empirical data.

But, instead of physical offices being planted in the Bay Area, the tech industry will heed way to the “spirit” of Silicon Valley with offices in far-flung places.

And remember that all of these new tech talent strongholds will need housing, and housing that an IT worker making $150,000 per year desires.

No wonder why San Jose real estate has dropped in the past year, people and their paychecks are on the way out.

July 19, 2019

Tech Letter

Mad Hedge Technology Letter
July 19, 2019
Fiat Lux

Featured Trade:

(CLOUD 101)
(AMZN), (MSFT), (GOOGL), (DOCU), (CRM), (ZS)

July 17, 2019

Tech Letter

Global Market Comments
July 17, 2019
Fiat Lux

Featured Trade:

(THE LEADER OF THE PACK),
(GOOGL)

The Leader of the Pack

Tech Letter

The future is coming a lot faster than anyone expected.

Waymo, once the top-secret Alphabet autonomous driving subsidiary, has beaten all comers to the punch.

The desert state of Arizona granted a permit for it to commence with their autonomous fleet as a commercial entity and the business has rolled out to select riders.

This permit means that Waymo’s futuristic robo-taxi can charge passengers for profit.

The vehicles started testing in 2017 and were monitored with a human safety engineer inside. This is a big deal from a regulatory point of view.

First mover advantage is pivotal in dictating an agenda and setting the rules of the road in the world of innovation.

The desperation of being first to market was epitomized by an email that former top engineer Chris Urmson sent Alphabet founders Larry Page and Sergey Brin, “We have a choice between being the headline or the footnote in history’s book on the next revolution in transportation. Let’s make the right choice.”

Waymo, a subsidiary of Alphabet (GOOG), is the preeminent force in the quest for mass market driver-less vehicles.

Before Waymo was coined, Google's self-driving-car research was an internal program referred to as Project Chauffeur. The project was created in 2009, hidden from the public eye to keep its technology safeguarded from intruders.

Alphabet invested at least $1.1 billion between 2009 and 2015 to grab the undisputed lead position of this newly created industry.

Most industry analysts estimate that commercialization of level 4 self-driving vehicles will occur sometime around 2020.

The time sensitivity is palpable as Waymo has a chance to flood American streets with its technology before GM (GM) or Uber can get off the starting blocks.

Waymo outmuscled its opponents reaching a Level 3 standard in 2012.

Level 4 is the grade that automakers wish to proceed with. Although not fully Level 5 automated, Level 4 technology can operate under controlled factors without a driver.

The Fiat Chrysler minivans tricked out with Waymo technology have been racking up test miles in Phoenix, Arizona to the tune of around 5 million on Level 4 technology.

Arizona has been a fertile breeding ground for driver-less car development since 2015 when Governor Doug Ducey signed an executive order giving authority to state agencies to “undertake any necessary steps to support the testing and operation of self-driving vehicles on public roads within Arizona.”

The success or failure in Arizona will go a long way to test the quality and sustainability of this new phenomenon.

It helps a lot that Phoenix streets are laid out in a simple grid that the current level of artificial intelligence finds easy to recognize and understand.

Waymo is essentially Uber with no driver.

Drivers cost money. Waymo hopes to remove the highest input in ride sharing transport - the driver itself.

Uber routinely shells out driver subsidies equating to around 72% of quarterly gross revenue.

Waymo plans to expand its coverage to other locations.

Google CFO Ruth Porat has gone on record saying “We do continue to explore a range of options beyond the program we’re piloting in Phoenix, including ride sharing and personal use vehicles, logistics, deliveries, and working with cities to help them address public transportation objectives.”

The first commercial operation has been groundbreakingly successful in Arizona and is crucial to enhance consumer sentiment for reliable driver-less vehicles.

The accumulated data will be vital to prove Waymo’s safety record.

If all goes smoothly, Waymo’s autonomous vehicles and technology will spread like wildfire to other locations.

The potential success will fundamentally change the way people live their lives.

Up to 10 million employed drivers are set to be on the chopping block in America.

That includes about 3.5 million professional truck drivers who earn between $30,000-$45,000 per year along with 2 million Uber/Lyft drivers participating in the gig economy at $7.25 an hour.

The mass adoption of autonomous vehicles will eliminate a huge chunk of the American workforce, while redrawing additional income streams to Alphabet (GOOG).

Insurance companies would take a direct hit with the future pipeline of drivers irrevocably thwarted from learning how to drive.

If the preliminary data comes up roses, parents will not allow their 16-year-old kid to learn how to drive and instead throw them into a Waymo to be chauffeured to school.

Also, the tragic 40,000 annual fatalities caused by motor vehicle crashes will drop off a cliff.

The pick up in productivity would be astounding as workers will no longer need to drive themselves anymore, cutting costs and allowing additional time to work while in transit.

The unintended consequences will change the world while making the leaders of the space richer. A deeper underlying effect is that it will strengthen (GOOG)’s credentials going forward to apply A.I. in other spheres.

July 16, 2019

Diary, Newsletter, Summary

Global Market Comments
July 16, 2019
Fiat Lux

Featured Trade:

(THE BIGGEST TELL IN THE MARKET RIGHT NOW),
(GOOGL), (FRC), (PINS), (WORK), (UBER),
(ADSK), (WDAY), (SNE), (NVDA), (MSFT),
(POPULATION BOMB ECHOES),
(CORN), (WEAT), (SOYB), (DBA), (MOS)

July 10, 2019

Tech Letter

Mad Hedge Technology Letter
July 10, 2019
Fiat Lux

Featured Trade:

(THE LOPSIDED WORLD OF TECH)
(FB), (GOOGL)

The Lopsided World of Tech

Tech Letter

Is it unfair?

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

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

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

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

What is money not going into?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A win-win situation unfolded.

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

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

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

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