Global Market Comments
August 27, 2020
Fiat Lux
Featured Trade:
(WHY YOU MISSED THE TECHNOLOGY BOOM AND WHAT TO DO ABOUT IT NOW),
(AAPL), (AMZN), (MSFT), (NVDA), (TSLA), (WFC), (FB)
Tag Archive for: (MSFT)
I often review the portfolios of new subscribers looking for fundamental flaws in their investment approach and it is not unusual for me to find some real disasters.
The Armageddon scenario was quite popular a decade ago. You know, the philosophy that said that the Dow ($INDU) was plunging to 3,000, the US government would default on its debt (TLT), and gold (GLD) was rocketing to $50,000 an ounce?
Those who stuck with the deeply flawed analysis that justified those conclusions saw their retirement funds turn to ashes.
Traditional value investors also fell into a trap. By focusing only on stocks with bargain-basement earnings multiples, low price to book values, and high visible cash flows, they shut themselves out of technology stocks, far and away the fastest growing sector of the economy.
If they are lucky, they picked up shares in Apple a few years ago when the earnings multiple was still down at ten. But even the Giant of Cupertino hasn’t been that cheap for years.
And here is the problem. Tech stocks defy analysis because traditional valuation measures don’t apply to them.
Let’s start with the easiest metric of all, that of sales. How do you measure the value of sales when a company gives away most of its services for free?
Take Google (GOOG) for example. I bet you all use it. How many of you have actually paid money to Google to use their search function? I would venture none.
What would you pay Google for search if you had to? What is it worth to you to have an instant global search function? Probably at least $100 a year. With 70% of the global search market comprising 2 billion users that means $140 billion a year of potential Google revenues are invisible.
Yes, the company makes a chunk of this back by charging advertisers access to these search users, generating some $38.94 Billion in revenues and $9.95 billion in net income in the most recent quarter. It would have been an $8.2 billion profit without the outrageous $5 billion fine from the European Community.
But much of the increased value of this company is passed on to shareholders not through rising profits or dividend payments but through an ever-rising share price. If you’re looking for dividends, Google doesn’t exist. It is also very convenient that unrealized capital gains are tax-free until the shares are sold.
I’ll tell you another valuation measure that investors have completely missed, that of community. The most successful companies don’t have just customers who buy stuff, they have a community of members who actively participate in a common vision, which is then monetized. There are countless communities out there now making fortunes, you just have to know how to spot them.
Facebook (FB) has created the largest community of people who are willing to share personal information. This permits the creation of affinity groups centered around specific interests, from your local kids’ school activities to municipality emergency alerts, to your preferred political party.
This creates a gigantic network effect that increases the value of Facebook. Each person who joins (FB) makes it worth more, raising the value of the shares, even though they haven’t paid it a penny. Again, it’s advertisers who are footing your tab.
Tesla (TSLA) has 400,000 customers willing to lend it $400 billion for free in the form of deposits on future car purchases because they also share in the vision of a carbon-free economy. When you add together the costs of initial purchase, fuel, and maintenance savings, a new Tesla Model 3 is now cheaper than a conventional gasoline-powered car over its entire life.
REI, a privately held company, actively cultivates buyers of outdoor equipment, teaches them how to use it, then organizes trips. It will then pursue you to the ends of the earth with seasonal discount sales. Whole Foods (WFC), now owned by Amazon (AMZN), does the same in the healthy eating field.
If you spend a lot of your free time in these two stores, as I do, The United States is composed entirely of healthy, athletic, good looking, and long-lived people.
There is another company you know well that has grown mightily thanks to the community effect. That would be the Diary of a Mad Hedge Fund Trader, one of the fastest growing online financial services firms of the past decade.
We have succeeded not because we are good at selling newsletters, but because we have built a global community of like-minded investors with a common shared vision around the world, that of making money through astute trading and investment.
We produce daily research services covering global financial markets, like Global Trading Dispatch and the Mad Hedge Technology Letter. We teach you how to monetize this information with our books like Stocks to Buy for the Coming Roaring Twenties and the Mad Hedge Options Training Course.
We then urge you to action with our Trade Alerts. If you want more hands-on support, you can upgrade to the Concierge Service. You can also meet me in person to discuss your personal portfolios at my Global Strategy Luncheons.
The luncheons are great because long term Mad Hedge veterans trade notes on how best to use the service and inform me on where to make improvements. It’s a blast.
The letter is self-correcting. When we make a mistake, readers let us know in 60 seconds and we can shoot out a correction immediately. The services evolve on a daily basis.
It all comes together to enable customers to make up to 50% to 60% a year on their retirement funds. And guess what? The more money they make, the more products and services they buy from me. This is why I have so many followers who have been with me for a decade or more. And some of my best ideas come from my own subscribers.
So, if you missed technology now, what should you do about it? Recognize what the new game is and get involved. Microsoft (MSFT) with the fastest-growing cloud business offers good value here. Amazon looks like it will eventually hit my $3,000 target. You want to be buying graphics card and AI company NVIDIA (NVDA) on every 10% dip.
You can buy the breakouts now to get involved, or patiently wait until the 10% selloff that usually follows blowout quarterly earnings.
My guess is that tech stocks still have to double in value before their market capitalization of 26% matches their 50% share of US profits. And the technologies are ever hyper-accelerating. That leaves a lot of upside even for the new entrants.
I Finally Found Tech Stocks!
Mad Hedge Technology Letter
August 26, 2020
Fiat Lux
Featured Trade:
(THE EMPTY PIPELINE OF TECH INNOVATION)
(AAPL), (FB), (AMZN), (GOOGL), (NFLX), (TSLA), (SNAP), (MSFT), (ORCL), (TWTR)
The oligarchical regime of Northern Californian tech companies stopped innovating because they don’t have to.
When you have a monopoly – you have one objective – to crush anything that remotely resembles competition.
That has been happening for years now by the Silicon Valley oligarchs and the government still hasn’t taken their finger out to do much about it.
Honestly, my bet is that most of U.S. Congress own stock portfolios and these portfolios are spearheaded by the likes of Apple (AAPL), Facebook (FB), Amazon (AMZN), Google (GOOGL), Netflix (NFLX), and possibly even Tesla (TSLA), if they want a little growth.
It’s a direct conflict of interest, but that's not surprising for politics in 2020, is it?
The government likes to jawbone to the public saying they will make competition a level playing field, but actions show they are doing the opposite.
The Silicon Valley oligarchs are whispering in the ear of Congress and they listen.
Who would want Congress to lose money in their retirement portfolios, right?
Well, what now?
Fast forward to the future - mid-September, TikTok — the Chinese-owned, video-sharing phenomenon — MUST sell its U.S. operations.
Given the app’s 100 million U.S. users, this forced divestment by President Trump has triggered a delirious auction now pitting tech giants Microsoft (MSFT), Oracle (ORCL), and Twitter (TWTR) against one another.
The White House and Big Tech are boiling the free for all down to a combined story of national security and opportunistic capitalism amid unfortunate geopolitical tension between the U.S. and China.
But the ultimatum to ByteDance, TikTok’s owner, is more accurately understood as a dark window into Silicon Valley’s utter failure to innovate, and a warning signal of its transformation into a mere protector of long-established turf.
Silicon Valley has long adhered to the motto, “Move fast and break things” – but that was long ago when Steve Jobs was busy making the first iPhone.
The truth is Silicon Valley couldn’t be more corporate than it is now, and they use the corporate machine to serve the ends they desire.
Big Tech is just in love with buybacks like the rest of corporate America and the only reason they avoid it now is to appear as if they are in tune with public discourse and not tone deaf.
Huawei, another punching bag of the Trump administration’s tech war with China, best foreshadowed the optics.
In remarks to reporters in March 2019, Chinese politician Guo Ping said, “The U.S. government has a loser’s attitude. They want to smear Huawei because they can’t compete with us.”
ByteDance produced the hottest new social media platform on a global scale, and Facebook, in typical fashion, responded by brazenly copying TikTok, adding a feature called Reels to Instagram.
Don’t forget that Mark Zuckerberg has been attempting to destroy Snapchat (SNAP) for years after CEO Evan Spiegel refused to sell it to Zuckerberg.
The rest of the tech ecosphere has turned a blind eye to the anti-trust violations because they don’t want to be the next takeout target.
Make no bones about it, Silicon Valley, with the help of the Trump administration, is about to do a smash and grab job on China’s best tech growth asset.
This cunning maneuver alone has the knock-on effect of not only extending the tech rally in U.S. public markets but increasing the scarcity value and emboldening the Silicon Valley oligarchs.
I’m all about good deals and robbing Chinese tech in broad daylight is overwhelmingly bullish for the U.S. tech sector.
Imagine adding another Instagram to the appendage of an already mammoth tech company.
So why innovate? Why deploy capital into research and development when you can just nick a foreign company's crown jewel?
Even if you hate Silicon Valley at a personal level, it is literally impossible to short them, and now they are resorting to stealing companies, what other passes will government, society, and corporate America give American tech?
In either case, it’s not for me to judge, and as a technology analyst - I am bullish U.S. tech.
Global Market Comments
August 20, 2020
Fiat Lux
Featured Trade:
STORAGE WARS),
(MSFT), (IBM), (CSCO), (SWCH),
Mad Hedge Technology Letter
August 14, 2020
Fiat Lux
Featured Trade:
(BIG TECH AND THE FUTURE OF COLLEGE CAMPUSES)
(SPG), (AMZN), (APPL), (MSFT), (FB), (GOOGL)
The genie is out of the bottle and things will never go back to how they once were. Sorry to burst your bubble if you thought the economy, society, and travel rules would just revert to the pre-coronavirus status quo.
They certainly will not.
One trend that shows no signs of abating is the “winner take all” mentality of the tech industry.
Tech giants will apply their huge relative gains to gut different industries.
Once a shark smells blood, they go in for the kill; and nothing else will suffice until these revenue machines get their way in every other adjacent industry.
Recently, we got clarity on big box malls becoming the new tech fulfillment centers with the largest mall operator in the United States, Simon Property Group (SPG), signaling they are willing to convert space leftover in malls from Sears and J.C. Penny.
Then I realized that another bombshell would hit sooner rather than later.
College campuses will become the newest of the new Amazon, Walmart, or Target eCommerce fulfillment centers starting this fall, and let me explain to you why.
When the California state college system shut down its campuses and moved classes online due to the coronavirus in March, rising sophomore Jose Garcia returned home to Vallejo, California where he expected to finish his classes and hang out with friends and family.
Then Amazon announced plans to fill 100,000 positions across the U.S at fulfillment and distribution centers to handle the surge of online orders. A month later, the company said it needed another 75,000 positions just to keep up with demand. More than 1,000 of those jobs were added at the five local fulfillment centers. Amazon also announced it would raise the minimum wage from $15 to $17 per hour through the end of April.
Garcia, a marketing and communications major, applied and was hired right away to work in the fulfillment center near Vallejo that mostly services the greater Bay Area. He was thrilled to earn extra spending money while he was home and doing his schoolwork online.
This is just the first wave of hiring for these fulfillment center jobs, and there will be a second, third, and fourth wave as eCommerce volumes have exploded. Even college students desperate for the cash might quit academics to focus on starting from the bottom in Amazon.
Even though many of these jobs at Amazon fulfillment centers aren’t those corner office job that Ivy League graduates covet, in an economy that has had the bottom fall out from underneath, any job will do.
Chronic unemployment will be around for a while and jobs will be in short supply.
When you marry that up with the boom in ecommerce, then there is an obvious need for more ecommerce fulfillment centers and college campuses would serve as the perfect launching spot for this endeavor.
The rise of ecommerce has happened at a time when the cost of a college education has risen by 250% and, more often than not, doesn’t live up to the hype it sells.
Many fresh graduates are mired in $100,000 plus debt burdens that prevent them from getting a foothold on the property ladder and delays household formation.
Then consider that many of the 1000s of colleges that dot America have borrowed capital to the hills building glitzy business schools and rewarding the entrenched bureaucrats at the school management level outrageous compensation packages.
The cost of tuition has risen by 250% in a generation, but has the quality of education risen 250% during the same time as well?
The answer is a resounding no, and there is a huge reckoning about to happen in the world of college finances.
America will be saddled with scores of colleges and universities shutting down because they can’t meet their debt obligations.
Not to mention the financial profiles of the prospective students have dipped by 50% or more in the short-term with their parents unable to find the money to send their kids to college.
Then there is the international element here with the lucrative Chinese student that added up to 500,000 total students attending American universities in the past.
They won’t come back after observing how America basically shunned the pandemic and the U.S. public health system couldn’t get out of the way of themselves after the virus was heavily politicized on a national level.
The college campuses will be carcasses with mammoth buildings ideal to be transformed into eCommerce inventory centers.
The perfect storm is hitting on every side for Mr. Jeff Bezos to go in and pick up a bunch of empty college campuses for pennies on the dollar as the new Amazon fulfillment centers.
This will happen as the school year starts and schools realize they have no pathway forward and look to liquidate their assets.
Defaults will happen by the handful in the fall, while some won’t even open at all because too many students have quit.
Then the next question we should ask is: will a student want to pay $50,000 in tuition to attend online Zoom classes for a year?
My guess is another resounding no.
By next spring, there will be a meaningful level of these college campuses that are repurposed, as eCommerce delivery centers with the best candidates being near big metropolitan cities that have protected white collar jobs the best.
The coronavirus has exposed the American college system, b as university administrators assumed that tuition would never go down.
Not every college has a $40 billion endowment fund like Harvard to withstand today’s financial apocalypse.
It’s common for colleges to have too many administrators and many on multimillion-dollar packages.
These school administrators made a bet that American families would forever burden themselves with the rise in tuition prices just as the importance of a college degree has never been at a lower ebb.
Like many precarious industries such as college football, commercial real estate, hospitality, and suburban malls, college campuses are now next on the chopping block.
Big tech not only will make these campuses optimized for delivery centers but also gradually dive deep into the realm of educational revenue, hellbent on hijacking it from the schools themselves as curriculum has essentially been digitized.
Colleges will now have to compete with the likes of Google (GOOGL), Facebook (FB), Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT) directly in terms of quality of digital content since they have lost their physical presence advantage now that students are away from campus.
Tech companies already have an army of programmers that in an instance could be rapidly deployed against the snail-like college system.
The only two industries now big enough to quench big tech’s insatiable appetite for devouring revenue is health care and education.
We are seeing this play out quickly, and once tech gets a foothold literally on campus, the rest of the colleges will be thrust into an existential crisis of epic proportions with the only survivors being the ones with large endowment funds.
It’s scary, isn’t it?
This is how tech has evolved in 2020, and the tech iteration of 2021 could be scarier and even more powerful than this year’s iteration. Imagine that!
AMAZON PACKAGES COULD BE DELIVERED FROM HERE SOON!
Mad Hedge Technology Letter
August 10, 2020
Fiat Lux
Featured Trade:
(SCRAPING THE BOTTOM OF THE TECH BARREL WITH UBER)
(UBER), (LYFT), (FB), (AMZN), (GOOGL), (NFLX), (AAPL), (MSFT)
The coronavirus and the resulting effects from it have had the single most sway on tech companies since the 2001 tech bust.
Marginal tech companies or even quasi-fraudulent ones have been exposed for what they are, while the secondary effects from the virus have supercharged the behemoths of the industry.
The stock market has no earnings growth in the past 5 years without the earnings from Microsoft (MSFT), Facebook (FB), Apple (AAPL), Google (GOOGL), Amazon (AMZN), and Netflix (NFLX). That means that without the Republican corporate tax cut, there has been negative earnings growth in the past five years.
One of those tech companies at the bottom of the barrel has been chauffeur service company Uber (UBER) and their latest earnings report is a glaring indictment of a shoddy business model that operates in a gray area.
The only reason this stock is at $33 is because of the piles of easy money printed by the central bank.
Uber needs all the help they can get, and shares are still trading 20% below the IPO price.
Competitor chauffeur service Lyft (LYFT) is doing even worse registering a 50% decline since the IPO.
Let’s do a little snooping around to see why these companies are doing so poorly and why you shouldn’t even think about investing in these companies long-term.
No matter how you dice it up, Uber’s core business, the one where they refuse to properly compensate their drivers, had a disaster of a quarter with gross ride volumes down 73% year-over-year.
Before we go any further with this one, I would like to point out yes, other areas of the business grew substantially, the problem is that the “other” part of the business is only 30% of total revenue.
Therefore, when 70% of your business that relies on pure volume to scale out crashes by 73%, it doesn’t really matter what else is in the report.
The only sensible idea now is capturing a snapshot of the silver linings, of which there were a few.
Delivery volumes through Uber Eats were up 49%, but the problem here is that first, it’s not profitable per delivery and second, it’s still a small part of the business.
Uber acquired Postmates who is another loss-making delivery service and the idea behind this is to achieve significant cost savings by scaling out these powerful assets.
The problem here is that it is essentially throwing good money on top of bad money because it’s proven that deliveries don’t make money per ride and that won’t change in the near future.
CEO of Uber Dara Khosrowshahi is on record saying Uber will become “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”
This is almost like saying we won’t lose as much money as before and ironically, Dara Khosrowshahi has withdrawn this statement as the ride-sharing model has been repudiated by the consumer during the coronavirus.
Nowhere in the earnings report is the explanation of how Dara Khosrowshahi plans to attract people to share a car ride with a stranger during a global pandemic.
He didn’t share a solution because there isn’t one, hence the 73% decline in ride volumes.
If we assume this company is semi-fraudulent, then the silver lining would be that ride volumes didn’t decline by 100%.
That is where we are now with U.S. corporate companies such as the airlines that fired their employees but have subsidized them to stick around even though there is no work.
Instead of re-imagining itself through bankruptcies, the Fed has encouraged many marginal companies by breathing life into their finances through cheap loans.
This gives failing firms a last chance to enrich management with the capital and “cash out” before they hand the business off to someone who will essentially plan to do the same.
I will say that traders might have a trade or two in this one, because it’s hard to imagine Uber posting another 73% loss in ride volume and a dead cat bounce trade could be in the cards.
Long term investors should steer clear of this one and allow Uber to struggle on its own and just maybe in 5 or 10 years, it might just be “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”
With so many high-quality tech companies and even one that is about to add super growth elements like TikTok into its portfolio, there are so many superior names to deploy capital in the tech ecosphere.
Either you must be galvanized by a gambler’s mentality to invest in Uber, or losing money is something that is habitual in your routine.
Mad Hedge Technology Letter
August 5, 2020
Fiat Lux
Featured Trade:
(MICROSOFT GOES FROM STRENGTH TO STRENGTH)
(MSFT), (GOOGL), (FB), (AMZN)
