Mad Hedge Technology Letter
July 19, 2019
Fiat Lux
Featured Trade:
(CLOUD 101)
(AMZN), (MSFT), (GOOGL), (DOCU), (CRM), (ZS)
Mad Hedge Technology Letter
July 19, 2019
Fiat Lux
Featured Trade:
(CLOUD 101)
(AMZN), (MSFT), (GOOGL), (DOCU), (CRM), (ZS)
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)
I am constantly looking for “tells” in the market, little nuggets of information that no one else notices, but gives me a huge trading advantage.
Well, there is a big one out there right now. San Francisco commercial real estate prices are going through the roof, smashing new all-time records on a monthly, if not weekly, basis.
The message for you traders is loud and clear. You should be picking up the highest quality technology growth stocks on every dip for they all know some things that you don’t. Their businesses are about to triple, if not quadruple, over the coming decade.
Technology stocks, which now account for 26% of stock market capitalization, will make up more than half of the market within ten years, much of that through stock price appreciation. And they are all racing to lock up the office space with which to do that….now.
San Francisco office rents reached a record in June as the continued growth of tech — now turbocharged by nearly $100 billion in new capital raised in a series of initial public offerings — met a severe space crunch.
Asking rents rose to a staggering $84.16 per square foot annually for the newest and highest quality offices in the central business district and citywide asking rents for such spaces known as Class A are up over 9% from the prior year. The citywide office vacancy rate was 5.5% in June, down from 7.4% a year ago.
Demand shows no sign of stopping. Brokerage CBRE reported around 20 large tenants are seeking more space. Google and Facebook each want to lease as much as 1 million square feet in additional San Francisco office space — room for more than 6,500 employees.
Google (GOOGL) confirmed on Tuesday that it recently signed an office lease at the Ferry Building, its fifth expansion since 2018.
First Republic Bank (FRC) signed the biggest lease of the second quarter. It expanded by 265,000 square feet at 1 Front St. Financial firms and companies in other sectors continue to scrap with tech companies for space.
What’s the tech connection here? The bank’s expansion is fueled largely by the rise of tech. Its clients include wealthy tech employees, and it could benefit from the wave of local stock-market debuts — an example of how the booming tech sector also lifts the financial sector.
In addition, local Bay Area home prices could get a turbocharger by the fall when restrictions on stock sales expire for some companies that went public in the spring.
San Francisco companies that have gone public continue to grow by leaps and bounds. Pinterest (PINS), Slack (WORK), and Uber (UBER) also signed office leases this year with room for thousands of new employees.
Tech companies Autodesk (ADSK) and Glassdoor also signed deals at 50 Beale St. in the spring. In a sign of the city’s rapidly changing economy, old line construction firm Bechtel and Blue Shield, the legacy health insurer, are both moving out of 50 Beale St. Sensor maker Samsara, software firm Workday (WDAY), and Sony’s (SNE) PlayStation video game division also expanded.
Globally, San Francisco has the seventh-highest rents in prime buildings. It’s still behind financial powerhouses Hong Kong, London, New York, Beijing, Tokyo and New Delhi (San Francisco’s average office rents beat out New York.)
Downtown San Francisco’s office costs in top buildings, including service charges and taxes, are $130 per square foot, while Hong Kong’s Central district is the world’s highest at $322 per square foot.
Only a handful of new office projects are being built, and future supply is further constrained by San Francisco’s Proposition M which limits the amount of office space that can be approved each year. That is creating a steadily worsening structural shortage. Only two large office projects are under construction without tenant commitments.
Which tech stocks should you be picking up now? NVIDIA (NVDA) has recently suffered a major haircut, thanks to the trade war with China. Microsoft (MSFT) seems hellbent on making its way from $140 to $200 a share due to its massive expansion into the cloud.
Global Market Comments
July 11, 2019
Fiat Lux
Featured Trade:
(THE INSIDER’S VIEW ON THE FUTURE OF TECHNOLOGY),
(AMZN), (GOOG), (DELL), (MSFT), (EBAY),
(MY DATE WITH HITLER’S GIRLFRIEND)
Global Market Comments
June 21, 2019
Fiat Lux
Featured Trade:
(MONDAY, JULY 8 VENICE, ITALY STRATEGY LUNCHEON)
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
(WHY TECHNICAL ANALYSIS DOESN’T WORK)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)
Mad Hedge Technology Letter
June 13, 2019
Fiat Lux
Featured Trade:
(THE TRADE WAR MOVES DOWN MARKET)
(DOCU), (PSTG), (ZUO), (MSFT), (PYPL), (ADBE)
To understand the consequences of the global trade war, just take a look at the second-tier software companies.
There has been softness in the latest earnings reports and guidance signaling a lukewarm upcoming summer.
The best-case scenario is the likes of DocuSign (DOCU) and Zuora (ZUO) rallying into the end of the year.
That is hardly a given considering the global turmoil has shifted supply chains in every which way as well as denting overall demand.
Cloud-based companies have seen meaningful weakness this earnings season, even some of them absorbing heavy losses in the wake of their quarterly results, but analysts aren’t ready to write off this industry yet.
Referencing the latest industry survey, 20 software companies reported results in the last month, and of those, only six saw a positive response in their stock prices.
DocuSign and Pure Storage (PSTG) were among names that got clobbered, along with cloud-computing plays like Cloudera Inc., Nutanix Inc., Box Inc., and Pivotal Software Inc.
The current malaise in software is due to higher valuations and macroeconomic issues which subsequently elevates uncertainty.
There is no reason to go hysterical over this, and in no way, shape, or form, does this signal an imminent implosion of cloud companies, any incremental caution may be reversible if macro indicators and sentiment rebound.
And this rebound can be swift once all the stars align together.
Adding to the comfort is that some of the sharp drawdowns were company-specific reasons.
MongoDB Inc. or Zscaler Inc., were coming off strong year-to-date advances in their shares and it was time to take profits before the next upward explosion.
Cybersecurity company Zscaler, is appropriately accounting for outperformance and have already been crushing higher than normal expectations.
DocuSign eclipsed expectations on some metrics but disappointed on others, such as billings growth.
This disappointing miss punished the company with a drop of 15% in the pre-market session, as DocuSign grew sales by 27%, a lower rate than in previous quarters.
Management blamed the poor performance to an elongated sales cycle.
Bulls were hoping for a beat-and-raise quarter and instead got in-line numbers with some soft spots around the periphery.
Investors aren’t in a charitable mood and the sensitive mood around geopolitics has made investors more agitated with a shorter leash.
There was a tone of a broader deceleration in software demand prompting stronger names to get comingled together, but the bulk of this negative price action has been overdone.
Even further down the pecking order, results from smaller cloud firms have pointed to more fundamental issues, and these stocks have emerged as a particularly weak sub-sector.
A number of these companies reigned in their forecasts, a trend that has buttressed analyst caution over the group.
Considering that many companies have labored and there exist clear narrative similarities, it’s hard not to surmise that some real systemic pains in infrastructure exist.
Many in the industry are acutely aware of the growing chorus of companies blaming competition or poor sales execution.
Lower growth rates are effectively the predominant reason for lower stock prices in this group of cloud companies.
On the flipside of this weaker cloud growth are the heavy hitters who are throwing around their weight getting through largely unscathed.
If any of these bigger cloud companies can fuse together a business model with no China exposure, then shares are likely stable to upward trending.
A company like Adobe (ADBE) is a perfect company to look at with an unpretentious yet steady growth rate and wildly successful products.
If we were to look at more growth-based companies with larger scale, then PayPal (PYPL) and Microsoft (MSFT) epitomize the type of cloud companies that are thriving in this environment and if geopolitics subsides, take on another 10% in sales.
Not only is the weather hot in the summer, but the anti-trust regulators are turning up the heat on certain tech companies on anti-trust concerns.
This could be a time to wait out those stocks and there could be another move to the upside if regulation is weaker than expected.
Mad Hedge Technology Letter
June 10, 2019
Fiat Lux
Featured Trade:
(WILL REGULATION KILL TECHNOLOGY?)
(FB), (MSFT), (GOOGL)
The Technology Hunger Games of 2019 is best viewed through the lens up top - the 30,000-foot view will offer insight into how the cookie will crumble.
Understanding the mechanisms which will either stop the Silicon Valley tech renaissance in its wake or deliver a supercharged boost to this sector is essential to dissecting the U.S. economy moving forward.
Silicon Valley has experienced a sensational generation by any yardstick and sometimes that is lost in the fog of war with the 24-hour news cycle hellbent on stealing the mojo of the tech industry.
Do or die regulation is shaping up to be the most critical acid test in the tech industry since the creation of the internet.
How will big American tech firms adjust to this new normal of government intervention forcing them to meaningfully alter their DNA?
Is a paradigm shift in store for the relationship that is the consumer and a tech company?
The American economy is probably the closest thing that can be passed off as unfettered capitalism.
This type of capitalism is predicated on scarce regulation which is an important part of the underlying theory.
With thin regulation, “animal spirits” can mushroom industries and its underlying companies to superstardom, we have seen this over and over again with companies like Google and Facebook.
On the flip side, we have austerity and economic vigilance.
Just to take a look around the globe and you will understand what I mean.
Germany is the economic gem of Europe and its namesake union motoring the 28-country block as the mainstay hub of innovation and value creation in the region.
But that does not mean they condone unfettered capitalism.
This is the same government that buttressed the call for austerity for the Greek and Italian government when these two entered uncontrollable debt cycles.
Deutsche Wohnen SE fell 8.7% in Frankfurt, while Vonovia SE dropped 5.5% whom are Germany’s largest residential landlords.
I thought buy to let was a guaranteed cash cow? What happened?
Germany’s largest residential landlords publicly traded shares cratered on the anxiety that Berlin will enact a rent freeze for the next five years in reaction to a surge in rental prices.
Deutsche Wohnen who owns 112,000 units is fighting fiercely to overturn this piece of legislation as they are the main recipient or culprits of the housing renaissance causing residential property opportunities or challenges to explode in the artsy Germany city.
Although residential property income is hardly connected to the fortunes of global technology, the regulation sets the tone for other pieces of the economy as a whole.
Take a quick rundown of other European nation states and the red tape is slapped around in abundance.
The end result is that Europe, even with German ingenuity, has been unable to deliver a tech company that can look the Silicon Valley FANGs in the eye and regulation is a big reason why.
Europe is essentially America with no tech companies because of it.
If you want to shovel through the recycling to pick up a name or two, then Swedish-based Spotify, the music streaming platform, would be apt and on the chips side, ARM Holdings, a British semiconductor company with many of its chips installed inside of Android systems.
These names are few and far between.
ARM Holdings was acquired by Softbank for $23 billion in 2016, a bargain buy at 2019 standards.
While America has privatized away many industries, take a look at other countries like China, who are propping up zombie banks and other state-owned companies accumulating more junk-graded debt.
I would argue that centrally planned economies like China and North Korea possess governments who get in the way of their economy more often than not to maintain strict control over its populace.
This is why private businesses often get the shaft of the top-down way of governing which hurts the free or not so free markets.
The biggest event in tech in the next 2 years will be if the big tech giants break up or not because of anti-trust tinged worries.
Microsoft’s regulatory mess was the last time the American government rolled up their sleeves and intervened this boldly into the tech sector and the functioning of it.
Remember that Microsoft missed search.
They allowed Google and then Facebook to launch and now we are back at the anti-trust table figuring out again if a reset is necessary or not.
This happened to Microsoft because they were scared to go into that part of tech for fear of more anti-trust scrutiny.
If the government does pound Silicon Valley with harsh anti-trust rulings, these big platforms won’t be able to lean on its richer parent companies to bail them out since they will be separate.
I believe that if Google, Apple, and Amazon are cut apart and set free into the world, it will incite another technological renaissance for another thirty years.
Competition mixed with free markets has a funny way of working itself out.
As I see it, these monstrous platforms are stifling innovation now and choking off smaller companies in the incubation stage that could become the next Google.
Releveling the playing field will spur economic innovation, improve technological techniques, boost job creation, and deliver even better customer experience and prices to the consumer.
Another development which is just as interesting is the market for big data.
Data could be rerouted from the proprietary black boxes of Google and Facebook and into a public market that puts a price on data.
If big data ever became a commodity sold from a market, it would mean that the accuracy of data would improve, and companies would be able to produce better products.
As it stands, big companies receive free data by the gimmick of giving away free services, these companies, in turn, manipulate and slice up the data any way they see fit to monetize.
I believe that the ad marketplace for Facebook and Google is somewhat of a broken and disconnected experience with many third-party companies questioning if it is a black hole that ad budgets are disappearing into.
The digital ad industry will undergo a serious facelift because of government regulation.
If big tech is divvied up, there will be winner and losers.
Not every tech company will survive the breakup because not every tech company is created equal.
A new type of digital marketplace will be formed once again allowing small business to bypass Facebook creating another tsunami of wealth creation.
If the FANGs aren’t broken up, then expect unfettered capitalism to go unperturbed, albeit with slow to moderate growth, instead of the renaissance I mentioned above.
Incremental gains cannot supplant wholesale enhancements.
This all means that your only choice is to own technology stocks in both scenarios – particularly the best of breed with the most cutting-edge technology.
The only way to suppress tech shares in the long run is if the American economy decides to socialize or nationalize big swaths of the private economy.
Let’s hope Washington doesn’t kill the goose that lays the golden eggs.
Global Market Comments
June 10, 2019
Fiat Lux
Featured Trade:
(JUNE 21 AUCKLAND NEW ZEALAND STRATEGY LUNCH)
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE GRAND PLAN)
(MSFT), (GOOGL), (AMZN), (TESLA), (TLT), ($TNX)
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