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The Market Outlook for the Week Ahead, or The Trade Alert Drought

Like it or not, we have a trade alert drought on our hands.

I just ran the numbers on 200 potential trades in stocks, bonds, foreign exchange, commodities, precious metals, and real estate, and there was not a single one that was worth executing.

They all had one thing in common: for taking huge risks, there were only paltry profits on offer. Even with a 90% success rate, I would still lose money.

And here is the problem. Massive quantitative easing from the US Federal Reserve is keeping the prices of all assets artificially high. But fears of a global Coronavirus pandemic are keeping all prices capped. The spread between the bid and the offer is only 3%. That is not enough to make an honest living, nor even a dishonest one.

I’ve seen all this before. The US in 1974, Tokyo in 1989, NASDAQ in 1999 presented similar trading dilemmas. The outcome is always the same. Prices always go up much longer than expected and then are followed by horrific crashes. Only when the last dollar is sucked in do trends change.

So, for right now, I would rather do nothing than something. We are in a contest to see who can make the most money with the fewest drawdowns, not to see who can strap on the most trades. The latter makes your broker rich, not you.

Cash is a position, it is an opinion, and it has option value. A dollar at a market top is worth $10 at a market bottom. Opportunity cost is not to be underestimated.

For the time being, everything depends on the Coronavirus. It is universally believed that the Chinese data is wildly inaccurate, possible by tenfold. The risks to the markets are similarly underestimated by US investors.

That became screamingly clear to me after returning from a trip halfway around the world where my temperature was taken every time I crossed a border and planes had to be sterilized before boarding

So, the smart game here is to be patient and learn some discipline. Wait for the market to come to you. This is a year when it will be incredibly difficult to make money and extremely easy to lose it.

All trade alert droughts end. Whether it will be sooner or later is anyone’s guess.

China is planning massive stimulus, to get the economy back on track. GDP could drop from 6% to 0% and maybe -6% thanks to the Coronavirus. A borrowing stampede is underway as shut down companies seek to address hemorrhaging cash flow.

Tesla (TSLA) exploded again to the upside, up 10% at the opening. The company has become a good news factory. The German government stepped in to subsidize a massive Gigafactory there. I won’t touch the stock here, but my long terms target is still $2,500.

Tesla finally took my advice and launched a $2 billion common stock offering at these lofty prices. It should be $5 billion. They can retire all their debt, including the convertible bonds, and with no dividend they can operate at a zero cost of capital. Elon Musk is taking $10 million of the deal. He took $100 million of the last offering. Buy (TSLA) on dips. Losses pile up for the short-sellers. Tesla always does the right thing after trying everything else out first.

The Fed’s Jay Powell cheers the economy but warned that the Coronavirus could become a factor. He also cautioned about a federal deficit that will top $1 trillion this year.

With the economy growing at a 2.2% annual rate, it’s below the Obama era growth. Did anyone notice that he said he would trim back QE by reigning in the repo program initiated last fall? Risk in the stock market is now extremely high.

Apple (AAPL) and Microsoft (MSFT) are now 10% of the entire stock market and are wildly overbought. Such incredible concentration is a typical sign of a topping market. Virtually all the stocks Mad Hedge has been recommending for the last decade are at new all-time highs. Be careful what you wish for.

Household Debt soared hitting a 12-year high. It’s up $601 billion to $14 trillion. It’s pedal to the metal for consumer spending, another classic market-topping indicator. What happens when the bill comes due and interest rates rise?

MGM (MGM) canceled guidance as the Coronavirus upends their business. High-end Chinese gamblers won’t show up to lose gobs of money at the gaming tables if they can’t get here. The epidemic has put the whole gaming industry into turmoil. Call me after new virus cases peak in China. Avoid (MGM).

Boeing had no net deliveries of aircraft in January, the first time since 1962, but the stock rose anyway. That tells me the bottom is firmly in. Buy (BA) on dips. When will the suffering of one of America’s best-run companies, accounting for 3% of GDP, end?

Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to maintain new all-time highs. I came out of my last position in Boeing (BA) to beat the ex-dividend day and a possible call on my short February $280 calls.

My Global Trading Dispatch performance rose to a new high at +359.00% for the past ten years. February stands at -0.04%. My trailing one-year return is stable at 47.39%. My ten-year average annualized profit ground back up to +35.31%.

All eyes will be focused on the Coronavirus still, with deaths over 1,800. The weekly economic data are virtually irrelevant now. However, some important housing numbers will be released.

On Tuesday, February 18 at 8:30 AM, the NY State Manufacturing Index for February is released.

On Wednesday, February 19, at 9:30 PM, January Housing Starts are out.

On Thursday, February 20 at 8:30 AM, Weekly Jobless Claims come out. The February Philadelphia Fed Manufacturing Index is announced.

On Friday, February 21 at 10:30 AM, January Existing Home Sales are printed. The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I’ll be driving back from Lake Tahoe, where I spent the long weekend catching up on the markets. There was virtually no snow, amazing for February, but great hiking.

Since I will be dropping 7,200 feet from Donner Pass and I have the new expended range Model X, I will be able to make it the 220 miles home on a single charge.

In two years, I’ll be able to make the 440-mile round trip on a single charge when the new Tesla Cyber truck comes out. Of course, people will think I’m nuts and my kids have refused to be seen in the cutting edge vehicle, but when did that ever stop me?

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

February 5, 2020

Tech Letter

Mad Hedge Technology Letter
February 5, 2020
Fiat Lux

Featured Trade:

(HOW TO TRADE THE CORONAVIRUS)
(APPL), (MSFT), (TSLA), (MU), (WDC), (ZM)

How to Trade the Coronavirus

Tech Letter

Like a powerful mule, I believe the American tech sector will muscle through the shock of the China coronavirus.

The tech sector will do what it does best, take the lead and put the entire American economy on its back and carry it through when doubts of decelerating global growth are asked of it.

I quantify this as an opportunity for the American tech sector.

Let’s look at some of the short-term contagion American tech companies are absorbing, as well as some opportunities in tech delivered by this sad pandemic.

Apple (AAPL) has made the decision to shutter all Apple stores in mainland China.

Their corporate offices have also gone into sleep mode and that means 10,000 people will need to make do with work stoppages which also include the component makers that supply Apple.

The stoppage is until February 9^th, but only if the coronavirus has been effectively thwarted.

The Chinese populace isn’t willing to go out on the street and have barricaded themselves inside their apartments to avoid catching the virus.

Quarantining large areas is an unprecedented move from the Chinese communist party highlighting the poor handling of the situation in the early stages.

China is a critical revenue driver for Apple constituting 15% of revenue.

The delay in manufacturing will result in 3% of iPhone unit shipments being pushed out from March to June.

However, if the lockdown spills into late February or March, then there will be a major hit to the Chinese consumer which could muddy Apple’s bottom line.

Apple’s supply chain could get up-and-running if the shutdown lasts a few weeks but if we are talking months then project dates could get put on the permanent back burner.

Apple is arguably the most prominent American tech company to be affected deeply by the coronavirus but there are others.

The Chinese communist party has put the operation of the new Shanghai Tesla (TSLA) factory on ice which will delay the company’s production of the Model 3 there.

The ramp-up of the Model 3 production will be delayed by a week and a half and the shutdown may “slightly” impact the company’s profitability in the first quarter of 2020, said Tesla’s finance chief Zach Kirkhorn.

As of now Tesla has estimated a 10-day delay to the Shanghai-built Model 3s due to a government-required factory shutdown and the facility will remain locked until February 9th.

Tesla have been churning out cars at its Shanghai factory only since the end of 2019.

The deliveries are an emerging revenue driver as Tesla hopes to gain a foothold in China, the world’s largest market for electric vehicles.

Fortunately, Shanghai-produced Teslas only make up a tiny part of Tesla’s overall revenue, meaning there will be minimal impact to the financials.

The outbreak could have a positive effect for some domestic semiconductor companies.

The chaos resulting from the virus will likely upset operations at Wuhan-based Yangtze Memory Technologies Co. and Wuhan Xinxin Semiconductor Manufacturing Corp., who have been stealing market share from their American competitors.

Yangtze Memory Technologies is China’s leading NAND flash memory producer.

NAND chips are the flash memory chips used in USB drives and smaller devices such as digital cameras as opposed to DRAM, or dynamic random access memory, the type of memory commonly used in PCs and servers.

Micron (MU) and Western Digital (WFC) could swoop in to meet the extra demand.

Another company that could seize a great opportunity because of the coronavirus is Zoom Video Communications (ZM).

The CEO of Zoom Video said, “If you cannot travel ... you need to have a very reliable secure tool like Zoom” and product usage “is very, very high since the last of the month, last week. Almost every day - that’s a record usage.”

Since Chinese tech workers are barricading themselves indoors, Zoom has been the tool of choice to collaborate with coworkers who are in the same situation.

Not that the video conferencing software company needed help, I have recommended this company as a solid buy and hold since the stock dipped to $62.

This new boost will pour gas on the flames and the stock price reacted in lockstep by rocketing 15% in just one trading day.

When the likes of Alphabet’s Google, Facebook, Apple, Microsoft, and Ford Motor are ordered to work from home, videoconferencing, online meetings, chat and mobile collaboration services shoot through the roof.

Video conferencing will become a $43 billion total addressable market in the coming years, and I believe Zoom is easily a $150 stock.

In short, the coronavirus will hurt some tech companies short-term, benefits others, and have no effect on tech firms with negligible China exposure.

Facebook is a stock that I recently executed a call spread on, and they are blocked from operating in the mainland and will feel no difference from this virus outbreak.

Looking even deeper into the matter, the short-term hit to revenues will only be temporary unless this virus wipes out most of China.

The most likely scenario is that less than 1,000 people will eventually die from this and 99.9% of that will be deaths in mainland China.

Investors should look at buying on any substantial dip – the tech narrative is still unbroken.

February 5, 2020

Diary, Newsletter, Summary

Global Market Comments
February 5, 2020
Fiat Lux

Featured Trade:

(A NOTE ON OPTIONS CALLED AWAY),
(MSFT), (TLT), (BA), (GOOGL), (SPY)

January 22, 2020

Tech Letter

Mad Hedge Technology Letter
January 22, 2020
Fiat Lux

Featured Trade:

(THE HOLLOW VICTORY FOR TECH IN THE CHINA TRADE DEAL)
(MSFT), (AMZN), (HUAWEI)

The Hollow Victory for Tech in the China Trade Deal

Tech Letter

The Davos World Economic Forum is the optimal place to get a snapshot of the state of the American technology sector and apply its underpinnings to an overall trading strategy for 2020.

Stepping back, one clear theme is the lasting effects of the trade war and how that will manifest itself in the broader tech sector.

We got some serious sound bites from CEO of Microsoft Satya Nadella at Davos who is convinced that mutual economic saber-rattling between the US and China will show up in higher costs because of the misallocation of resources.

The most critical point of contention is the development in the semiconductor space as we move into the 5G world and this $470 billion industry which realizes cost savings from scaling by global supply is splintering off as we speak into two separate industries.

This just translates into higher costs to source components for your Microsoft Surface laptop or your Apple Ear Buds.

The follow-through effect is ultimately bludgeoning global growth rates and tech intermediaries will be forced to pick up the extra tab or face the looming decision to pass costs on to the consumer.

As we move forward, the administration is considering more limits to US semiconductor companies’ access to the Chinese consumer market.

The scaremongering fueled by the rise and threat of Huawei has reached fever pitch.

Remember that even with the aggression of the American administration hoping to cap Huawei’s revenue explosion, Huawei still managed to grow sales 18% last year to $122 billion.

I can tell you that if the U.S. administration came after the Mad Hedge Technology Letter guns blazing, we wouldn’t be sitting here growing 18% annually!

The U.S. administration hasn’t stopped at Huawei and is putting in shifts attempting to convince other nations to avoid using Chinese infrastructure equipment for the 5G revolution.

The “Phase One” of the trade agreement is largely seen as a moot point in the technology community and in some cases can be argued as a net negative to component makers whose access to the local Chinese market has narrowed.

The agreement signed also delivered no meaningful protection to intellectual property for US technology companies working with China which was largely viewed as the main catalyst provoking a geopolitical fight.

The trade war has sped up the bifurcation of internets, better known as “splinternet,” and I believe that sometime in the near future, you will need to download Chinese software and platforms to function inside of China.

Much of these misunderstandings stem from the lack of trust that has accumulated between the two parties.

The American tech sector and Wall Street have indirectly subsidized China’s technological rise to this point and now they must go head-to-head in every future technology such as artificial intelligence, 5G, fintech, augmented reality, and virtual reality.

This appears to be the new normal - a frosty and adversarial tech relationship.

There is now zero good will between each other.

The trust of tech on American shores could almost be ironically argued that it is worse than the trust level with China.

Edelman’s 20th annual trust barometer surveyed more than 34,000 adult respondents in 38 markets around the world.

It found that 61% of participants said the pace of change in technology is too fast and government does not fully understand emerging technologies enough to regulate them efficiently.

Trust in tech from 2019 to 2020 declined the most significantly in France, Canada, Italy, Russia, Singapore, the U.S. and Australia.

Much of the narrative has been about the domination of American tech by a handful of actors that has seen American companies go up against foreign governments.

France and America recently announced a temporary truce after the French President Emmanuel Macron reached out by phone to President Trump hoping to end the threat of tariffs while they work out a broader accord on digital taxation.

The French leader agreed to postpone until the end of 2020 a tax that France levied on big tech companies last year and in turn, the U.S. will delay the counter-tariffs that were in the works set to be levied on the French.

And it’s not just the French.

India has taken heed from the brooding trouble between the encroachment on sovereignty and American tech giants by adopting an aggressive stance towards Amazon.

Amazon CEO Jeff Bezos' lowlight of a recent India work trip came in the form of being snubbed by the Indian government.

India’s commerce minister Piyush Goyal said, “It’s not as if they (Amazon) are doing a great favor to India when they invest a billion dollars.”

He called Amazon a capital guzzler equating its mounting losses up to “predatory pricing or some unfair trade practices.”

India is on the verge of turning protectionist on foreign tech and this flies in the face of the tech atmosphere even just a few years ago.

Governments have come to realize that America’s FANGs are too dominant and entrenched often resulting in a net negative to the local populace.

More often than not, American tech found ways of rerouting local revenue to coffers of a few billionaires while paying zero local tax.

The easy money has been made and now the Tim Cooks and Sundar Pichais of the world will have to fight tooth and nail with not only the U.S. antitrust regulators, but foreign governments.

This is why a handful of tech companies this dominant has been the outsized winners over the past generation as their share prices have gone from the lower left to the upper right but now command minimal consumer trust.

The ultimate Davos message is that big tech continues to grind higher, but alarm bells have started to ring.

There’s only so much friction they can handle before investors pull the rug.

January 15, 2020

Tech Letter

Mad Hedge Technology Letter
January 15, 2020
Fiat Lux

Featured Trade:

(THE TRADE ALERT DROUGHT EXPLAINED)
(GOOGL), (AMZN), (MSFT), (FB), (JPM)

The Trade Alert Drought Explained

Tech Letter

Why has there been a dearth of Mad Hedge Tech trade alerts to start the year?

Let me explain.

Love it or hate it – earnings' season is about to kick off.

And now, this is the part where it starts to get ugly with consensus of a 2% year-over-year decline in fourth-quarter S&P 500 earnings.

Banks are expected to be a rare bright spot and JPMorgan (JPM) delivered us stable results as one of the first to report.

The unfortunate part of the equation is that a lot has to go right for tech shares to go unimpeded for the rest of the year.

What we have seen in the first 2 weeks of the year is a FOMO (fear-of-missing-out) environment in which valuations have lurched forward to 20 times forward earnings.

Tech is overwhelmingly carrying the load and I have banged on the drums about this thread advising readers to be acutely aware of a heavy positive bias towards the FANGs in 2020.

Well, that is already panning out in the first two weeks.

Examples are widespread with Facebook (FB) up over 8% and Apple (AAPL) already topping 6% to start the year.

It would be farfetched to believe that the tech sector can keep pilfering itself higher in the face of negative earnings growth.

However, behind the scenes, relations between China and America are improving, the threat of war with Iran is subsiding, and the Fed continues strong support tempering down risk to tech shares.

The situation we find ourselves in is that of an expensive tech sector that will again guide down on upcoming earnings’ reports telegraphing softness moving into the middle part of the year.

The ensuing post-earnings sell-off in specific software stocks will offer optimal short-term entry points.

The current risk-reward of chasing FANGs at these levels is unfavorable.

Another glaring example of the FANG outperformance is Alphabet who rose 26% last year.

They are on the brink of joining the $1 trillion club that Apple and Microsoft (MSFT) have joined.

Its market value currently sits idling at $985 billion and its surge towards the vaunted trillion-dollar mark is more of a case of when than if.

Alphabet (GOOGL), more or less, still expands at the same rate of low-20% annually that it did 10 years ago.

Sales have ballooned to $160 billion annually and they sit at the forefront of every cutting-edge sub-sector in technology from artificial intelligence, autonomous driving, and augmented reality.

The engine that drives Google is still its core advertising business and strategic premium acquisitions like YouTube and penetration into other fast-growing areas such as cloud computing.

It has rounded out into a broad-based revenue accumulator.

Apple was the first public company to surpass a $1 trillion market cap and ended the year up 86% in 2019, and it has only gone up since then currently checking in at a $1.36 trillion market cap.

Microsoft followed Apple, hitting the $1 trillion mark during the first half of 2019, and it is now worth $1.23 trillion.

Amazon fell back after surging past the $1 trillion mark but inevitably will achieve it on the next heave up.

Amazon shares have been quickly heating up since its capitulation from $2,000 in July 2019 and round out the group of overperforming tech behemoths.

Although the rush into big-cap tech stocks in the first two weeks has been a bullish signal, it still doesn’t marry up with the lack of earnings growth in the overall tech sector.

Companies beating meager expectations will experience strong share appreciation although not at the pace of last year and will still serve investors pockets of overperformance.

We will find our spots to trade shortly, but better to keep our gunpowder dry at the moment.