August 23, 2019

Global Market Comments
August 23, 2019
Fiat Lux

Featured Trade:

(FXB), (NVDA), (MU), (LRCX), (AMD),
 (WFC), (JPM), (BIDU), (GE), (TLT), (BA)

July 30, 2019

Global Market Comments
July 30, 2019
Fiat Lux

Featured Trade:

(GLD), (GDX), (PALL), (PPLT),

July 29, 2019

Global Market Comments
July 29, 2019
Fiat Lux

Featured Trade:

(INTC), (GOOGL), (AMZN), (JPM), (FXB),

June 3, 2019

Global Market Comments
June 3, 2019
Fiat Lux

Featured Trade:

(SPY), ($INDU), (JPM), (MSFT), (AMZN), (TSLA)

March 22, 2019

Global Market Comments
March 22, 2019
Fiat Lux

Featured Trade:

(BA), (FCX), (IWM), (JNJ), (FXB), (VIX), (JPM)

March 20 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What do you make of the Fed’s move today in interest rates?

A: By cutting short their balance sheet unwind early and ending quantitative tightening (QT) early, it amounts to two surprise interest rate cuts and is hugely “RISK ON”. In effect, they are injecting $2.7 trillion in new cash into the financial system. New highs in stocks beckon, and technology stocks will lead. This is a game changer. In a heartbeat, the world has moved from QT to QE, and we already know what that means for socks. They go up.

Q: Why buy Boeing shares (BA) ahead of a global recession?

A: It’s an 18-day bet that I’ve made in the options market. The US economic data is already indicating recession. The data will continue to worsen and that will continue until we go into a recession. But that’s not happening in 18 trading days. Also, we’re getting into Boeing down 20% from the top so our risk is minimal.

 Q: Why are we in an open Russell 2000 (IWM) short position?

A: We now have three long positions— 40% on the long side with the Freeport McMoRan (FCX) double position. It’s always nice to have something on the other side to hedge sudden 145-point declines like we have today. Ideally, you want to be hedged at all times. But it’s hard to fund good companies to sell short in a bull market.

Q: Do you need some euphoria to get the Volatility Index (VIX) to the $30-$60 level?

A: No, you don’t need euphoria. You need fear and panic. The (VIX) is a good “fear index” in that it rises when markets are crashing and falling when markets are slowly rising. And for that reason, I’m not buying (VIX) right now. With a sideways to slowly rising market, we could see the $9 handle again before this move is over.

Q: What should be the exit on the Russell 2000 (IWM)?

A: One choice is taking 80% of the maximum profit when you hit it—that’s where the risk-reward tips against you if you keep the position. The other option is to be greedy and run it all the way into expiration, taking the full profit. It depends on your risk tolerance. Remember, we hit the 80% profit three times in March only to stop out of positions for a loss. The market just doesn’t seem to want to let you take the whole 100%.

Q: Why are all your expirations on April 18?

A: That’s when the monthly options expire; therefore, they have the most liquidity of any other option expiration. If you go with the weeklies before or after the monthlies, the liquidity declines dramatically, which can be very frustrating. Since I used to cover only the largest clients, we could only trade in monthlies because we needed the size.

Q: Will Johnson and Johnson (JNJ) survive all those talcum powder lawsuits?

A: They’ve been going on for 10 years—you’d think they’d know by now if they have asbestos in their talcum powder or not. I highly doubt this will get anywhere; they’ll probably win everything on appeal.

Q: What do you anticipate on Brexit?

A: I think eventually Brexit will fail; we’ll have a referendum which will get voted down, Britain will rejoin Europe, and the British pound (FXB) will go to $1.65 to the dollar where it was when Brexit hit three years ago, up from $1.29 today. It would be economic suicide for Britain to leave Europe, as they would have to compete against Europe, the US, and China alone, and they are slowly figuring that out. Demographic change alone over three years would guarantee that another referendum fails.

Q: My partner owns JP Morgan (JPM). Do you still say banks are not a good place to be?

A: Yes. Fintech is eating their lunch. If they couldn’t go up with interest rates moving up in the right direction, they certainly won’t be doing better now that interest rates are going down. Legacy banks are the new buggy whip industry.

Q: Why are commodities (FCX) increasing with a coming recession?

A: They are a hard asset and do better in inflation. Also, they’re stimulating their economy in China and we aren’t—commodities do better in that situation as China is the world’s largest buyer of commodities, as do all Chinese investments.

Q: Would you buy Biogen (BIIB) on the dip? Its down 30% today.

A: Canceling their advanced phase three trials for the Alzheimer drug Aducanumab is the worst-case scenario for a biotech company. Some $12 billion in prospective income is down the toilet and many years of R&D costs are a complete write-off. Avoid (BIIB) until the dust settles.






January 17, 2019

Mad Hedge Technology Letter
January 17, 2019
Fiat Lux

Featured Trade:

(WFC), (JPM), (BAC), (C), (GS), (XLF), (PYPL), (SQ), (SPOT), (FINX), (INTU)

Why FinTech is Eating the Banks’ Lunch

Going into January 2018, the big banks were highlighted as the pocket of the equity market that would most likely benefit from a rising rate environment which in turn boosts net interest margins (NIM).

Fast forward a year and take a look at the charts of Bank of America (BAC), Citibank (C), JP Morgan (JPM), Goldman Sachs (GS), and Morgan Stanley (GS), and each one of these mainstay banking institutions are down between 10%-20% from January 2018.

Take a look at the Financial Select Sector SPDR ETF (XLF) that backs up my point.

And that was after a recent 10% move up at the turn of the calendar year.

As much as it pains me to say it, bloated American banks have been completely caught off-guard by the mesmerizing phenomenon that is FinTech.

Banking is the latest cohort of analog business to get torpedoes by the brash tech start-up culture.

This is another fitting example of what will happen when you fail to evolve and overstep your business capabilities allowing technology to move into the gaps of weakness.

Let me give you one example.

I was most recently in Tokyo, Japan and was out of cash in a country that cash is king.

Japan has gone a long way to promoting a cashless society, but some things like a classic sushi dinner outside the old Tsukiji Fish Market can’t always be paid by credit card.

I found an ATM to pull out a few hundred dollars’ worth of Japanese yen.

It was already bad enough that the December 2018 sell-off meant a huge rush into the safe haven currency of the Japanese Yen.

The Yen moved from 114 per $1 down to 107 in one month.

That was the beginning of the bad news.

I whipped out my Wells Fargo debit card to withdraw enough cash and the fees accrued were nonsensical.

Not only was I charged a $5 fixed fee for using a non-Wells Fargo ATM, but Wells Fargo also charged me 3% of the total amount of the transaction amount.

Then I was hit on the other side with the Japanese ATM slamming another $5 fixed fee on top of that for a non-Japanese ATM withdrawal.

For just a small withdrawal of a few hundred dollars, I was hit with a $20 fee just to receive my money in paper form.

Paper money is on their way to being artifacts.

This type of price gouging of banking fees is the next bastion of tech disruption and that is what the market is telling us with traditional banks getting hammered while a strong economy and record profits can’t entice investors to pour money into these stocks.

FinTech will do what most revolutionary technology does, create an enhanced user experience for cheaper prices to the consumers and wipe the greedy traditional competition that was laughing all the way to the bank.

The best example that most people can relate to on a daily basis is the transportation industry that was turned on its head by ride-sharing mavericks Uber and Lyft.

But don’t ask yellow cab drivers how they think about these tech companies.

Highlighting the strong aversion to traditional banking business is Slack, the workplace chat app, who will follow in the footsteps of online music streaming platform Spotify (SPOT) by going public this year without doing a traditional IPO.

What does this mean for the traditional banks?

Less revenue.

Slack will list directly and will set its own market for the sale of shares instead of leaning on an investment bank to stabilize the share price.

Recent tech IPOs such as Apptio, Nutanix and Twilio all paid 7% of the proceeds of their offering to the underwriting banks resulting in hundreds of millions of dollars in revenue.

Directly listings will cut that fee down to $10-20 million, a far cry from what was once status quo and a historical revenue generation machine for Wall Street.

This also layers nicely with my general theme of brokers of all types whether banking, transportation, or in the real estate market gradually be rooted out by technology.

In the world of pervasive technology and free information thanks to Google search, brokers have never before added less value than they do today.

Slowly but surely, this trend will systematically roam throughout the economic landscape culling new victims.

And then there are the actual FinTech companies who are vying to replace the traditional banks with leaner tech models saving money by avoiding costly brick and mortar branches that dot American suburbs.

PayPal (PYPL) has been around forever, but it is in the early stages of ramping up growth.

That doesn’t mean they have a weak balance sheet and their large embedded customer base approaching 250 million users has the network effect most smaller FinTech players lack.

PayPal is directly absorbing market share from the big banks as they have rolled out debit cards and other products that work well for millennials.

They are the owners of Venmo, the super-charged peer-to-peer payment app wildly popular amongst the youth.

Shares of PayPal’s have risen over 200% in the past 2 years and as you guessed, they don’t charge those ridiculous fees that banks do.

Wells Fargo and Bank of America charge a $12 monthly fee for balances that dip below $1,500 at the end of any business day.

Your account at PayPal can have a balance of 0 and there will never be any charge whatsoever.

Then there is the most innovative FinTech company Square who recently locked in a new lease at the Uptown Station in Downtown Oakland expanding their office space by 365,000 square feet for over 2,000 employees.

Square is led by one of the best tech CEOs in Silicon Valley Jack Dorsey.

Not only is the company madly innovative looking to pounce on any pocket of opportunity they observe, but they are extremely diversified in their offerings by selling point of sale (POS) systems and offering an online catering service called Caviar.

They also offer software for Square register for payroll services, large restaurants, analytics, location management, employee management, invoices, and Square capital that provides small loans to businesses and many more.

On average, each customer pays for 3.4 Square software services that are an incredible boon for their software-as-a-service (SaaS) portfolio.

An accelerating recurring revenue stream is the holy grail of software business models and companies who execute this model like Microsoft (MSFT) and Salesforce (CRM) are at the apex of their industry.

The problem with trading this stock is that it is mind-numbingly volatile. Shares sold off 40% in the December 2018 meltdown, but before that, the shares doubled twice in the past two years.

Therefore, I do not promote trading Square short-term unless you have a highly resistant stomach for elevated volatility.

This is a buy and hold stock for the long-term.

And that was only just two companies that are busy redrawing the demarcation lines.

There are others that are following in the same direction as PayPal and Square based in Europe.

French startup Shine is a company building an alternative to traditional bank accounts for freelancers working in France.

First, download the app.

The company will guide you through the simple process — you need to take a photo of your ID and fill out a form.

It almost feels like signing up to a social network and not an app that will store your money.

You can send and receive money from your Shine account just like in any banking app.

After registering, you receive a debit card.

You can temporarily lock the card or disable some features in the app, such as ATM withdrawals and online payments.

Since all these companies are software thoroughbreds, improvement to the platform is swift making the products more efficient and attractive.

There are other European mobile banks that are at the head of the innovation curve namely Revolut and N26.

Revolut, in just 6 months, raised its valuation from $350 million to $1.7 billion in a dazzling display of growth.

Revolut’s core product is a payment card that celebrates low fees when spending abroad—but even more, the company has swiftly added more and more additional financial services, from insurance to cryptocurrency trading and current accounts.

Remember my little anecdote of being price-gouged in Tokyo by Wells Fargo, here would be the solution.

Order a Revolut debit card, the card will come in the mail for a small fee.

Customers then can link a simple checking account to the Revolut debit card ala PayPal.

Why do this?

Because a customer armed with a Revolut debit card linked to a bank account can use the card globally and not be charged any fees.

It would be the same as going down to your local Albertson’s and buying a six-pack, there are no international or hidden fees.

There are no foreign transaction fees and the exchange rate is always the mid-market rate and not some manipulated rate that rips you off.

Ironically enough, the premise behind founding this online bank was exactly that, the originators were tired of meandering around Europe and getting hammered in every which way by inflexible banks who could care less about the user experience.

Revolut’s founder, Nikolay Storonsky, has doubled down on the firm’s growth prospects by claiming to reach the goal of 100 million customers by 2023 and a succession of new features.

To say this business has been wildly popular in Europe is an understatement and the American version just came out and is ready to go.

Since December 2018, Revolut won a specialized banking license from the European Central Bank, facilitated by the Bank of Lithuania which allows them to accept deposits and offer consumer credit products.

N26, a German like-minded online bank, echo the same principles as Revolut and eclipsed them as the most valuable FinTech startup with a $2.7 Billion Valuation.

N26 will come to America sometime in the spring and already boast 2.3 million users.

They execute in five languages across 24 countries with 700 staff, most recently launching in the U.K. last October with a high-profile marketing blitz across the capital.

Most of their revenue is subscription-based paying homage to the time-tested recurring revenue theme that I have harped on since the inception of the Mad Hedge Technology Letter.

And possibly the best part of their growth is that the average age of their customer is 31 which could be the beginning of a beautiful financial relationship that lasts a lifetime.

N26’s basic current account is free, while “Black” and “Metal” cards include higher ATM withdrawal limits overseas and benefits such as travel insurance and WeWork membership for a monthly fee.

Sad to say but Bank of America, Wells Fargo, and the others just can’t compete with the velocity of the new offerings let alone the software-backed talent.

We are at an inflection point in the banking system and there will be carnage to the hills, may I even say another Lehman moment for one of these stale business models.

Online banking is here to stay, and the momentum is only picking up steam.

If you want to take the easy way out, then buy the Global X FinTech ETF (FINX) with an assortment of companies exposed to FinTech such as PayPal, Square, and Intuit (INTU).

The death of cash is sooner than you think.

This year is the year of FinTech and I’m not afraid to say it.




January 2, 2019

Mad Hedge Technology Letter
January 2, 2019
Fiat Lux

Featured Trade:

(SQ), (V), (MA), (AXP), (JPM)

The FANGs’ Path to Online Banking

Yu’e Bao or “leftover treasure” in English has caught the attention of more than 400 million Chinese investors.

This money market fund has exponentially grown into a $250 billion fund by the end of 2017, and is now the largest money market fund in the world!

This product isn’t offered by Bank of China or another giant state-owned bank or financial enterprise, but Alibaba’s (BABA) Ant Financial (gotta love those Chinese names).

Assets under management are up 100% YOY and it now accounts for a quarter of China’s money-market mutual fund industry in just one fund.

These inflows coincide with the sudden migration into mobile payments. Common folks are comfortable with investing their life savings in these short-term instruments with a too-big-to-fail, larger-than-life firm such as Alibaba.

Yu’e Bao derives its funds from Alipay users, Alibaba’s digital third-party platform, that allows consumers to pay for everything in life from theater tickets to utility bills.

Service is unified on a holistic graphic interface. Users can easily divert cash into this fund with a few screen taps on their app. Yu’e Bao’s ROI offers a seven-day annualized yield of 4.02%, down from the introductory annualized rate of 6.9% around the launch in 2013.

Yu’e Bao‘s short-term yield outmuscles the 1.5% interest rate on one-year Chinese bank deposits and the 3.6% yield on 10-year Chinese government debt.

Weak banking regulation has spawned a mammoth FinTech (financial technology) industry in the Middle Kingdom. Only one yuan (16 cents) is enough to create an account and considerable retail flow has rushed in.

China has catapulted ahead of the rest of the world emerging as the leader of global FinTech innovation. The pace, sophistication, and scale of development of China’s FinTech have surpassed the level in any other of the developed countries.

The country’s digital metamorphosis has enhanced e-commerce, payment systems, and connected logistical services. The Chinese discretionary spender for the past decade has been the deepest and most reliable lever of global growth.

Mobile third-party payments in China, 90% cornered by Tencent’s WeChat and Alibaba’s Alipay, are estimated to reach a lofty $6 trillion in revenue by 2019, more than 50 times that of the U.S.

These omnipresent payment systems are now deeply embedded into the fabric of Chinese society. It’s common to witness homeless people on Shanghai subways waving around a scannable image for WeChat or Alipay money transfers instead of asking for physical cash.

Even in rural farmlands, shabby convenience stores prioritize digital currency and sometimes don’t accept paper currency at all. Yes, China is beating the U.S. to a cashless society.

Digitization is changing the competitive balance, and global banks must embrace large-scale disruption caused by big tech platforms.

Banks in China regard these companies as potential collaborators resulting in a net positive long-term infusion of enhanced products and services.

Agreements have been forged between the Bank of China and Tencent, and the China Construction Bank has linked up with Alibaba.

China has incorporated the technical power of A.I. (artificial intelligence) and machine learning into its FinTech platforms at every opportunity. Robo-advisors are also making inroads creating a bespoke financial program for the individual.

This trend has so far failed to go viral in America where individuals still prefer plastic cards or even paper cash. E-commerce clocked in a paltry 9.1% of total U.S. retail sales in the third quarter of 2017.

Even though most of us have our heads buried deep in our smartphone virtual world, Americans are still programmed to whip out debit or credit cards at every opportunity.

Chinese who visit America carp endlessly about America’s archaic payment system.

Ultimately, American payment systems are ripe for digital disruption.

The American consumer will ultimately cause severe damage to MasterCard (MA), Visa (V), and American Express (AXP) which are happy with the current status quo.

The lack of innovation in the US FinTech sector is a failure in the otherwise fabulous technological leadership of the US. American smartphones should already be a fertile digital wallet, not just a niche market.

Savvy Jack Dorsey even invented a firm based on this inefficiency exploiting the lack of proficiency in domestic FinTech with Square (SQ).

And a vital reason the stock has gone parabolic this year is because of the brisk execution and the long runway ahead in this industry.

American big tech will gradually utilize China’s FinTech model and extrapolate it with “American personality.” It is much more of a two-way street now than before with cutting-edge ideas flowing both ways.

The next leg up after digital wallet penetration of FinTech is money market funds on tech platforms. In effect, the Chinese innovation of this industry has allowed more variations of potential financing for the ambitious Chinese, and the same trends will gradually appear on Yankee shores.

Ironically enough, Amazon’s (AMZN) land grab strategy is more prevalent in China as artificially low financing and juicier scale justify this strategy.

The scaling premium also explains why corporate China’s early adopter advantage is so effective because not many countries boast a 1.3-billion-person consumer market.

Soon, Americans will wake up to the reality that American FinTech must advance or foreign firms will rush in.

Mediocrity is not good enough.

iPhones and Android consumers could direct savings into tech money market funds with compounding yield all on a single digital platform.

Tech companies could deploy some of the repatriated cash to invest in some fledgling FinTech expertise to smoothly execute this new endeavor.

Consequently, a successfully created money market fund on a tech platform would enlarge the already substantial cash hoard these firms possess. Not only will the large tech companies flourish, but the big will get absolutely massive.

The determining factor is financial regulation. Capitol Hill has drawn a large swath of mighty Silicon Valley tech titans to testify because they are stepping on too many toes lately.

A scheme to hijack the digital payments market and dominate the mutual fund industry will cause unyielding push back in Washington especially when the Amazon death star continues pillaging select industries of their choosing and eliminating brick-and-mortar jobs by the millions.

J.P. Morgan (JPM) which has the largest institutional money market fund in the country and retail stalwarts such as BlackRock and Vanguard will be sweating profusely too if mega tech starts probing around its turf.

Alibaba is also coming for its bacon with the failed purchase of payment transfer service MoneyGram International (MGI) temporarily shutting out Jack Ma from a foothold in the American payment system industry.

And if the Chinese aren’t let in, there will be others sniffing around for the bacon, too.

The momentum for these financial instruments is robust as FinTech integrates deeper into consumer life. The global cash glut from a decade of cheap financing is causing profit-hungry investors to starve for high-yield vehicles.

The stability and clean balance sheets of tech giants give them ample chance to successfully execute. So, why can’t they also become banks? Would you buy an Apple, Amazon, or Google money market fund if they offered a 4% to 7% annualized yield?

I believe most Americans would.