(MSFT) Archives

About Your Protest-Proof Portfolio

Social unrest will have NO material effect on tech shares moving forward.

Some investors expected the Nasdaq (COMPQ) index to roll over big time, throttled by a national insurrection. Anti-police-violence protests, some becoming riots, have broken out in more than 60 cities.

However, it appears to be another false negative for the Nasdaq as it motors upwards acting on the momentum of outperformance during the coronavirus.

One thing that the coronavirus pandemic, as well as protests, have taught investors is the unwavering faith in technology’s strength will continue powering the overall market rebound.

Any social unrest will not stop tech shares because they simply don’t subtract from their revenue models.

This will perpetuate into the rest of 2020 and beyond.

Much of the public reaction from big tech has been paying some form of lip service about the national situation being untenable followed up with a small donation.

Apple (AAPL) says it's making donations to various groups including the Equal Justice Initiative, a non-profit organization based in Montgomery, Alabama that provides legal representation to marginalized communities.

To read more about big tech’s donations, click here.

Aside from some PR formalities, it will be business as usual after things settle down.

Apple might suffer some slight inconveniences of having some stores looted, but that doesn’t mean consumers can’t buy products online.

Tech companies simply contort to fit the new paradigm and that is what they are best at doing.

Apple has charged hard into the digital service as a subscription world that has served Amazon, Apple, Google (GOOGL), and Microsoft (MSFT) so well.

To read more about the robust performance of software stocks, please click here.

Many of these tech companies don’t need a physical presence to drive forward earnings, revenue models, and widen their competitive advantages.

That’s the beauty of it and their brands are so entrenched that it doesn’t matter what happens in the outside world at this point.

It’s true that a few tech companies might have to scale back or modify operations until the storm subsides but not at a great scale that will worry investors.

Amazon is reducing deliveries and changing delivery routes in some areas affected by the protests.

Big tech dodged a bullet with the majority of the financial burden falling on the shoulders of big-box retailers like Walmart (WMT) and Target (TGT) and city center-located businesses.

Walmart closed hundreds of stores one hour early on Sunday, but most are slated to reopen. Nordstrom (JWN) temporarily closed all its stores on Sunday.

Amazon (AMZN)-owned Whole Foods are often located in neighborhoods that are perceived likely to escape the bulk of the turmoil.

The events of the last few days will have significant side effects on the normalcy of society or the new normal of it.

Combined with the pandemic, consumers will opt for more spacious housing options in less concentrated areas of the U.S.

The social unrest once again delivers the goodies into the hands of e-commerce as people will be less inclined to leave their house to consume.

A stock that really sticks out during all of this is the leader in interconnected data centers Equinix (EQIX) because of the explosion of data being consumed from the stay-at-home revolution.

Sadly, the price of tech share does not account for life quality which is part of the reason we see stocks lurching higher.

By the time all the different crises, including coronavirus and protests, are snuffed out, we could be in a world where the only strong companies left are technology, "big tech".

They have an insurmountable lead at this point with guns still blazing.

When you add the windfall of trillions in cash the Fed has pumped out and unwittingly diverted into tech shares recently, it is hard to envision ANY scenario in which the Nasdaq will be down a year from now.

I am bullish on the Nasdaq index and even more bullish on big tech.

Even the supposed “rotation” to value has only meant that tech shares haven’t gone down.

A dip now in tech shares means shares dip for two hours before resurging.

Why would anyone want to sell the best and highest growth industry in the public markets with unlimited revenue-generating potential?

May 26, 2020

Diary, Newsletter, Summary

Global Market Comments
May 26, 2020
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or LOOKING FOR THE NEW AMERICA),
(FB), (AAPL), (NFLX), (GOOGL), (MSFT), (TSLA), (VIX)

Market Outlook for the Week Ahead, or Looking for the New America

Diary, Newsletter, Summary

We are getting some tantalizing tastes of the new America that will soon arise from the wreckage of the pandemic.

Companies are evolving their business models at an astonishing rate, digitizing what’s left and abandoning the rest, and taking a meat cleaver to costs.

The corporate America that makes it through to the other side of the Great Depression will earn far more money on far fewer sales. That has been the pattern of every recession for the past 100 years.

While the pandemic may take earnings down from $162 per S&P 500 share in 2019 to only $50 in 2020, it sets up a run at a staggering $500 a share during the coming Roaring Twenties and Golden Age. All surprises will be to the upside and anything you touch will make you look like a genius.

For example, Target’s online sales have exploded 153%, allowing customers to order their groceries online and pick them up at curbside. (TGT) pulled this off in a mere three weeks. Without a pandemic, it would have taken three years to implement such a radical idea, if ever.

Survival is a great motivator.

The (SPY) has been greatly exaggerating the public’s understanding of the stock market. Five FANGs and Tesla (TSLA) with 50%-200% moves off the bottom have made the index look irrationally strong.

The fact is that the majority who have shares have not even made a 50% retracement of this year’s losses. A lot of stocks, especially the reopening ones, are still crawling back of subterranean bottoms.

Investors now have the choice of chasing wildly expensive stocks that have already had spectacular runs, or cheap ones that will go bankrupt by the end of the year. It is a Hobson’s choice for the ages. I expect 10% of the S&P 500 to go under by the end of 2020.

I am spending a lot of time on the ground talking to businesses in California and Nevada and have come to two conclusions. They cannot fathom the true depth of the Depression we are now in and are greatly underestimating the length of time it may take to recover. We may not see the headline unemployment rate under 10% for years unless the government redefines the statistics, which they always do.

The S&P 500 is not the economy. It only employs 25% of America’s private sector labor force accounting for 20% of its total costs. Real estate accounts for another 15%. That leaves 35% of costs that can be completely eliminated or reengineered. This creates enormous share price upside possibilities.

The concentration of the market is the most extreme I have ever seen, with five stocks getting most of the action, (FB), (AAPL), (NFLX), (GOOGL), and (MSFT).

There is a staggering $3.6 trillion in equity allocations sitting on the sidelines in cash. All those who got out at the March bottom are now desperately trying to get back in at the May top. Algorithms are making sure you get out cheap and get back expensive.

It will all end in tears.

One of the stunning developments of the crash has been the near doubling of retail stock trading. Options trading has increased even more. Millions of stimulus check recipients have poured their newfound wealth into the stock market instead of spending it on consumer goods, like they were supposed to.

This explains the over-concentration on the five FANG stocks, (FB), (AAPL), (NFLX), (GOOGL), and (MSFT), the greatest momentum stocks are out age, but in high speculative ones like Tesla (TSLA). The lowest cost online platforms like Robin Hood (click here).

All of this is completely irrevocably changing the character of the stock market, perhaps permanently. This may also explain why the Volatility Index remains stuck above$26.

Fed Governor Jerome Powell said no recovery without vaccine, and that’s without a second wave. It could be a long wait. In the meantime, the Atlanta Fed said Q2 US GDP will be down -42%, the weakest quarter in American history. We find out mid-July.

Housing Starts collapsed by 30.2% in April, in the sharpest drop on record. But prices aren’t falling. There is still a massive bid under the market from still-employed millennials. Your home could be you best performing asset this year. The 30-year fixed rate mortgage at 3.0% is a big help.

Weekly Jobless Claims topped 2.4 million, taking the two-month total to a breathtaking 39 million. One out of four Americans is now unemployed, matching the Great Depression peak. US deaths just topped 98,000, 21 times China’s fatality rate where the disease originated and with four times our population. People will keep losing jobs until the death rate peaks, which could be many months, or years.

Leading Economic Indicators crashed by 4.4% for April, showing the economy is still in free fall. So, how much more stock do you want to buy here?

Up to 60% of mall tenants aren’t paying rent, with $7.4 billion skipped in April alone. See my earlier “Death of the Mall” piece. It’s another harsh example of the epidemic accelerating all existing trends.

The market is not reflecting the long-term damage to the economy, says my old buddy and Morgan Stanley colleague David Gerstenhaber. When the bailouts run out, the economy could go into free fall. It could take years to get below 10% unemployment rate again, as many of the layoffs and furloughs are permanent. Keep positions small. Anything could happen. I spent the 1987 crash with David.

Existing Home Sales cratered an incredible 17.8% in April to an annualized 4.88 million units, the largest one-month drop since 2010. Inventory dropped to an all-time low of only 1.7 million, down 19.7%, presenting a 4.1-month supply. Sellers failed to list and those who had a home took them off. Unbelievably, this pushed median home prices to a new all-time high of 286,000, up 7.4% YOY. The biggest sales fall in the west, where the US epidemic started.

China took over Hong Kong, suspending most civil liberties in response to Trump’s multiple attacks. And you know what? There is nothing we can do about it that hasn’t already been done. Talk about going into battle with no dry powder. I’m sure the US 7^th Fleet will be out there soon to provoke an attack. Anything to distract attention from the 100,000 Americans who died from Covid-19 on Trump’s watch. As if markets didn’t already have enough to worry about.

When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $0 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.

My Global Trading Dispatch performance had another fabulous week, up an awesome +4.97%, and blasting us up to a new eleven-year all-time high of 77%. It has been one of the most heroic performance comebacks of all time.

My aggressive short bond positions really delivered some nice profits, despite the fact the bond market went almost nowhere. That’s because time decay for the June 19 expiration is really starting to kick in. I also got away with a small long in the bond market for the second time in two weeks.

That takes my 2020 YTD return up to +10.86%. That compares to a loss for the Dow Average of -12.6%. My trailing one-year return exploded to 50.85%, nearly an all-time high. My eleven-year average annualized profit exploded to +35.21%.

The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here at https://coronavirus.jhu.edu.

On Monday, May 25, I’ll be leading the neighborhood veterans parade for Memorial Day. Markets are closed.

On Tuesday, May 26 at 9:00 AM, the S&P Case Shiller National Home Price Index is released.

On Wednesday, May 27, at 4:30 PM, weekly EIA Crude Oil Stocks are published.

On Thursday, May 28 at 8:30 AM, Weekly Jobless Claims are announced. We also get the second estimate for the Q1 GDP is printed. At 10:00 AM, April Pending Home Sales are announced.

On Friday, May 29, at 2:00 PM, the Baker Hughes Rig Count follows at 2:00 PM.

As for me, I will be hitting the town beaches at Lake Tahoe for the first time this spring, mask in hand, where waitresses serve you mixed drinks on order. Outdoors will be the only safe place this year.

Stay healthy.

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

May 20, 2020

Diary, Newsletter, Summary

Global Market Comments
May 20, 2020
Fiat Lux

Featured Trade:

(THE HYPER-ACCELERATION OF 5G)
(AMZN), (5G), (CCI), (MSFT), (NFLX), (APPL)

The Hyper-Acceleration of 5G

Diary, Newsletter

I will explain to everyone why a wonky side effect of coronavirus is supercharging the 5G revolution.

Market valuations reflect the state of expected future cash flows in a company.

Under this assumption, some could argue that most tech companies with staying power are almost a good buy at any price.

No-brainers would include a list of Microsoft, Amazon, Apple, and Netflix.

The health scare and the carnage associated with it has brought forward the tech industry as a whole to the forefront of the global economy.

When you mix that with the Fed hellbent on saving everything that has a heartbeat, it sets up conditions for heavy buying in an industry that is going to be king of the global economy anyway.

It is not a question of if, but when and the health phenomenon has accelerated the dramatic migration to tech by showing how business will be conducted in about 15 years.

The change took place in a blistering 4 weeks.

The clearest signal of who is really calling the shots in the equity market is looking at which companies are dragging it up.

Technology is shouldering the responsibility of the equity market by outperforming the broader market with many software companies’ share price higher than before the crisis.

For every Amazon or Microsoft, there is also a Macy’s or JC Penny showing that this is really a stock pickers market.

We have not only learned that tech companies are critical to our functioning as a society, but that large tech companies will be even more central than before even if they are currently losing gross revenue.

The relative gains to tech stemming from the coronavirus are equal or greater than an innovation of a game-changing product and will double the effect of 5G.

We are setting up for the Golden Age of 5G with tech poised to invade even more of the broader equity market.

One rough estimate notes that the 5G industry is expected to add about $40bn in incremental revenue to the semiconductor industry, add 5X growth in mobile data monthly traffic by 2024, and a $4.2tn boost to global economies from revenue streams connected to 5G in the next ten years.

I do agree that currently, the network effect is working in reverse order, but the positive force multiplier, when the economy is riding high again cannot be emphasized enough.

Digital revenue streams will effectively be pumped into every nook and crevice of the digital economy because of current modifications to the business environment.

When business does come back online, investors of physical assets will sell what they can at discounted prices to get into the digital ecosystem causing asset prices to explode as investors chase prices to the sky.

Do you remember commercial real estate guru and Colony Capital’s CEO Tom Barrack?

The company hoped to sell as much as 90% of its $20 billion property portfolio of hotels, warehouses, and other commercial real estate by the end of 2021.

They are also another big investor in nursing homes.

A real-estate pioneer who founded Colony in the early 1990s and is the firm’s chief executive and executive chairman, Barrack said he wanted to go “all digital.”

Rejigging the 29-year-old investment company represented an extreme response to the way technologies have been dismantling cash flow for almost every type of commercial real estate, and Barrack was met with fierce backlash from entrenched stakeholders regarding the new direction.

Commercial real estate and hotel operators have had to fight against the triple whammy of office sharing WeWork, short-term hotel platform Airbnb, and the coronavirus - a lethal three-part cocktail of malicious forces to the “traditional” model.

The coronavirus has proven Barrack was spot on with his synopsis, but he wasn’t able to get rid of Colony’s inventory of commercial real estate in the expeditious way he desired.

Other companies have taken a direct hit like 24 Hour Fitness who is pondering filing for bankruptcy, but I could say the same for a slew of companies like Colony Capital.

Another key manifestation of the current economic malaise is that regulators, antitrust, tax, foreign, and all of the above are less likely to disrupt big tech companies moving forward considering they may be the only ones able to get us out of a similar crisis in the future.

Government officials will be under rapid pressure to boost GDP levels and crimping big tech is counterintuitive to this overall goal.

I don’t agree with the glass half empty crowd who believe Amazon needs to be clamped down because of dominating retail during the time of the virus - if Amazon didn’t exist, the panic could have accelerated to an uncontrollable level creating anarchy in the streets.

The big boys have pushed soft power as a legitimate policy tool with Apple sourcing over 20 million face masks and is now building and shipping face shields.

Big tech is becoming like a mini-government in its own right.

Granted that thousands of bankruptcies from restaurants, nail salons, and yoga studio will be swept into the dust bin of economic history, but once the next iteration of the economic cycle turns up, tech is about to go gangbusters in a way many never thought imaginable.

Then if you bake a little 5G into the pecan pie, investors are justified to be salivating about the tech industry’s prospects.

Any deep-pocketed investors should be cherry-picking every quality 5G tech play possible because they will be the most supercharged sub-sector of tech once the economy is reset.

Any long-term investor with a pulse should buy Crown Castle International Corp. (REIT) (CCI) on any and all dips.

They are the largest owner of cell towers owning over 40,000 in the U.S.

May 8, 2020

Tech Letter

Mad Hedge Technology Letter
May 8, 2020
Fiat Lux

Featured Trade:

(WHY TECH IS THE BIG BAILOUT WINNER)
(EA), (ATVI), (TWLO), (UBER), (LYFT)

Why Tech is the Big Bailout Winner

Tech Letter

Today, we got a convincing signal that trillions of stimulus dollars are being diverted into one asset class – tech shares.

That’s right, even though main street has not participated in the V-shaped recovery that tech shares have basked in, tech’s profit engines have gotten through largely unscathed.

The earnings that have streamed out this week validate the big buying into tech shares and today’s price action was mouthwatering.

We had names like cloud communications platform Twilio (TWLO) rise 40% in one day, ride-sharing platform Lyft (LYFT) was up 21%, and Uber (UBER) another 11%.

Outperformance of 5% seemed pitiful today in an asset class that has gone truly parabolic.

Another sub-sector that can’t be held down is video games.

The rampant usage of video games dovetails nicely with the theme of tech companies who have triumphed the coronavirus.

There is nothing more like a stay-at-home stock than video game maker Electronic Arts (EA) who beat expectations during its March quarter.

The company reported adjusted earnings of $1.31 per share during its fiscal fourth quarter, topping consensus estimates at 97 cents a share.

Revenue also beat totaling $1.21 billion surpassing estimates by $.03 billion.

EA Sports has identified Apex Legends as their new growth asset and this free game is having a Fortnite-like growth effect.

Apex Legends was the most downloaded free-to-play game in 2019 on the PlayStation 4 system.

The full ramifications of Covid-19’s impact on EA’s business, operations, and financial results is hard to quantify for the long term and this has been a broad trend with many tech companies pulling annual guidance.

I can definitely say that the year 2020 is experiencing a video games renaissance.

On the downside, EA is heavy into sports video games, and cancellations of sports seasons and sporting events could impact results, given its popular sport simulation titles like FIFA and Madden NFL.

EA Sport’s competitor Activision Blizzard (ATVI) is positioned to reap the benefits by reimagining mainstay title Call of Duty Warzone and users have already hit 60 million players in just 2 months.

The result is accelerating momentum entering the second quarter from the dual tailwinds of strong execution and premium franchises following last year's increased investment.

With physical entertainment venues like movie theaters, live sports, and music venues closed, home entertainment services have pocketed the increased engagement.

Nintendo is another gaming company whose fourth-quarter profit soared 200% due to surging demand for its Switch game console, and that title Animal Crossing: New Horizons shifted a record 13.4 million units in its first six weeks.

Activision is riding other hit game franchises like World of Warcraft, Overwatch, and Candy Crush – to visit their roster of blockbuster games, please click here.

These blockbuster titles are carrying this subsector at a time when the magnifying glass is on them to provide the entertainment people crave at home.

Shares of EA and Activision Blizzard are overextended after huge run-ups and another gap up from better than expected earnings reports.

If there is a dip, then that would serve as an optimal entry point.

The lack of vaccine means that gaming will see elevated attention until there is a real health solution.

If there is a second wave that hits this fall, then pull the trigger on these video game stocks.

To visit Electronic Art’s website, please click here.

May 6, 2020

Tech Letter

Mad Hedge Technology Letter
May 6, 2020
Fiat Lux

Featured Trade:

(THE GOLDEN AGE OF BIG TECH HAS ONLY JUST BEGUN)
(AMZN), (MSFT), (AAPL), (FB), (GOOGL), (ZM)

The Golden Age of Big Tech Has Only Just Begun

Tech Letter

The tech market is telling us that the effects of coronavirus on the U.S. economy have accelerated the Golden Age of Big Tech pulling it forward to 2021.

You know, Big Tech is having their time in the sun when unscrupulous personal data seller Facebook is experiencing 10 times growth with its live camera product Portal video during the health crisis.

That is the type of clout big tech has accumulated in the era of Covid-19 and investors will need to focus on these companies first when putting together a high-quality tech portfolio.

Every investor needs upside exposure to a group of assets that is locked into the smartphone ecosphere.

There are no excuses.

Smartphones, although not a new technology, is now a utility, and the further away from the smartphone revenue stream you get, business is nothing short of catastrophic minus healthcare.

The health scare has ultimately justified the mammoth valuations of over $1 trillion that Apple, Microsoft, and Amazon command.

The next stop is easily $2 trillion and then some.

Consumers are so much more digitized in this day and age weaving in a tapestry of assets such as the iPhone at Apple, advertising at Facebook, and search ads at Google.

Can the coronavirus keep the digital economy down?

Green shoots are certainly popping up with regular consistency.

Facebook and Google have said that digital advertising has “stabilized.”

Apple, Amazon, Netflix, Facebook, and Google each reported financial results in the past week with profits and revenue that, while hit by the closure of the economy, still outperformed relative to the broader market.

Investors already priced in that Apple's iPhone sales temporarily disappeared, that Google's and Facebook's advertising revenue dropped and that Amazon is spending big to keep warehouse workers safe.

Forward expectations can only go north at this point reflecting a giant bull wave of buying that has benefited tech stocks.

Other top tier companies not in the FANG bracket have also gone gangbusters.

Zoom has turned into an overnight sensation now replacing all face-to-face meetings, sparking competition with Microsoft's Teams video chat and Google Meet.

The market grab that big tech has partaken in will position them as the major revenue accumulators for the next 25 years.

Unsurprisingly, Apple was the canary in the coal mine by calling out a dip in iPhone sales and manufacturing in China earlier in the year.

While iPhone's sales did fall, down nearly 7%, to $28.9 billion, its revenues from services and wearables, two categories that have been rising steadily for years, jumped 16.5% and 22.5% respectively.

Chip giant Qualcomm said phone shipments will likely drop about 30% around the globe in the June quarter while Apple rival Samsung, said phone and TV sales will "decline significantly" because of the coronavirus.

Google’s YouTube has grown 33% while the video giant keeps us entertained and Microsoft’s Xbox Game Pass subscription service notched more than 10 million subscribers.

Facebook said nearly 3 billion people use its collection of chat apps representing an 11% jump from a year ago.

Everywhere we turn, relative outperformance is evident which in turn minimizes the absolute underperformance in year to year growth.

The market is looking through and putting a premium on the relative outperformance.

Many are coming to the realization that the economy and population will live with the virus until there is a proper vaccine, meaning an elongated period of time where consumers are overloading big tech with higher than average usage.

President Trump’s chief economic adviser Larry Kudlow is projecting that the U.S. economy next year could see “one of the greatest economic growth rates.”

I would adjust that comment to say that big tech is tipped to be the largest winner of this monster rebound in 2021 putting the rest of the broader market on its back.

This is quickly turning into two economies – tech and everybody else.

The eyeballs won’t necessarily translate into a waterfall of revenue right away because of the nature of all the free services that they provide.

But at the beginning of 2021, a higher incremental portion of consumer’s salaries will be directed towards big tech and the fabulous paid services they offer.

Actions speak louder than words and Berkshire Hathaway’s Warren Buffett unloading billions in airline stocks is an ominous sign indicating that parts of the U.S. economy won’t come back to pre-virus levels.

The biggest takeaway in Buffet’s commentary is that he elected to not sell tech stocks like his big position in Apple validating my thesis that any investor not already in big tech will flood big tech with even more capital after being burnt in retail, energy, hotels, and airlines.

Then, when you consider the ironclad nature of tech’s balance sheets, even in the apocalyptical conditions, they will profit and rip away even market share from the weak.

It’s to the point where any financial advisor who doesn’t recommend big tech as the nucleus of their portfolios is most likely underperforming the wider market.

As the U.S. economy triggers the reopening mechanisms and we enter into the real meat and bones of the reopening, data will recover significantly signaling yet another leg up in tech shares.

Hold onto your hat!

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