(MSFT) Archives

Market Outlook for the Week Ahead, or The Good News is Out

After a China trade deal, UK election and a NAFTA 2.0 are announced, what is left to drive the stock market?

That is a very good question and explains why the Dow Average was up only a microscopic 3.33 points on Friday. It had spent much of the day down.

It’s not a pretty picture.

Not only is the market running out of drivers, the economic data is still decelerating, with the GDP running a 1.5% rate, inflation rising, and corporate earnings growth at zero, with earnings multiples at 17-year high.

A Wiley Coyote moment comes to mind.

And while we are finishing a great 27% year (56% for the Mad Hedge Fund Trader), we are in effect getting three years of performance packed into one. Not only did we pull forward a good chunk of 2020’s performance, we borrowed heavily from 2018 as well, coming in at such a low start as we did.

Thus 2019 might well get bookended by an 8% gain in 2018 and another 8% year in 2020, with dividends. Blame it all on the massive liquidity burst we got from the Fed that started last December and continues unabated.

Stocks have been floated by a tidal wave of new money creation worldwide. Globally, new money creation is running at a $1 trillion a month rate and much of that is ending up in the US stock market, especially in technology shares.

The rush was enough to drive Apple (AAPL) to a new all-time high at $275, pushing its market capitalization up to a staggering $1.2 trillion. It could surpass Saudi ARAMCO’s $2 trillion valuation in a year or two.

Steve Jobs’ creation now accounts for a mind-blowing 6% of the S&P 500 and 4% of total US stock market capitalization. It’s the best argument I’ve ever heard for becoming a hippy and dropping out of college after one quarter.

Which leads us to paint a picture for the 2020 stock market. Even the most optimistic outlook for next year, that of Ed Yardeni, is calling for only a 10% gain. Many prognostications are calling for negative numbers next year.

You might be better off parking your money in a 2% CD and taking a cruise around the world. I’ve done that before, and it works fantastically well.

You’re only going to have one shot at making money in 2020. Wait for a 10%-20% nosedive to go long. My guess is that happens when it becomes clear that the Democrats are dominating in the polls (Joe Biden is currently 14 points ahead in swing state Pennsylvania). No matter who wins, less borrowing, less spending, and higher taxes will prevail.

Then stocks will rally 10% AFTER the election because the uncertainty is gone. That will get you a 20%-30% profit in 2020, but only of you are a trader and follow the Mad Hedge Fund Trader. After basking in their own brilliance in 2019, 2020 might be a year when indexers wish they never heard of the term.

In the end, corporate earnings growth always wins, especially in tech, which is still growing at 20% a year. Remember, my 2030 forecast for the Dow Average is 125,000.

China (FXI) won big in mini trade deal. We rolled back a tariff increase that was never going to happen and the Chinese buy $50 billion worth of soybeans they were going to buy anyway, except at half the price that prevailed two years ago. All of it will come out of stockpiles built up during the trade war. Only the ag sector is affected, which is 2% of the US economy. The ag markets aren’t buying it. If this were a real trade deal, stocks would be up 1,000 points, not 89.

Conservatives won big in UK election. The British pound (FXB) is up 2% and stocks are soaring. A hard Brexit is coming, so look for Scotland to secede and Northern Ireland to join the Republic. The UK will be gone as we know it. Britain’s standard of living will plummet. Great Britain will no longer be great, and the Russians financed the whole thing.

Volatility crashed, as complacency rules supreme. Don’t buy (VIX) until we see the $11 handle again.

Chinese copper purchases hit a 13-month high, up 12.1% in November, to 483,000 metric tonnes. It explains the 78% move up in Freeport McMoRan (FCX) since October, the world’s largest producer. Obviously, someone believes a trade deal is coming. My long LEAP players love it.

US Consumer inflation expectations rebounded, up 0.1% to 2.5%, accounting to the New York Fed. That’s crawling up from a five-year low, a slightly positive economic note.

Saudi ARAMCO went public, with a 10% pop in the shares on the first two days, providing a $24 billion fund raise. This is one of the top three largest IPOs in history after Alibaba (BABA) and Softbank. It values the company at $1.88 trillion. Oil (USO) is down a dollar on the news, no longer needing artificial support to get the deal done. This could be one of the seminal shorts of our generation.

NAFTA 2.0 was signed, removing a potential negative from the market. It is 90% of the original NAFTA, not the “greatest trade deal in history” as claimed. Buy the main North/South railroad, Norfolk Southern (NSC) on the news.

Weekly Jobless Claims soared to a two-year high, by 49,000 to 252,000. Are stores laying people off from Christmas early this year, or did they never hire in the first place because the retail businesses are gone? Peak jobs are in. US job growth is now far slower than in the Obama era, as is GDP growth.

Most US companies will have fewer staff in 2020, except Mad Hedge Fund Trader. More automation and algos mean fewer humans. Only a capital spending freeze caused by the trade war kept a low of low-skilled people in their jobs.

This was a week for the Mad Hedge Trader Alert Service to catapult to new all-time highs.

My long positions have shrunk to my core (MSFT) and (GOOGL), which expire with the coming December 20 option expiration.

My Global Trading Dispatch performance ballooned to +356.00% for the past ten years, a new all-time high. My 2019 year-to-date catapulted back up to +55.86%. December stands at an outstanding +4.85% profit. My ten-year average annualized profit rebounded to +35.59%.

The coming week will be a noneventful one on the data front, with some housing data and the Q3 GDP on the menu. Anyway, everyone else will be out Christmas shopping or attending parties.

On Monday, December 16 at 9:30 AM, New York Empire State Manufacturing Index for December is out.

On Tuesday, December 17 at 9:30 AM, Housing Starts for November are released.

On Wednesday, December 18 at 11:30 AM, US EIA Crude Stocks for the previous week are announced.

On Thursday, December 19 at 8:00 AM Existing Home Sales are published. At 8:30 AM, we get Weekly Jobless Claims.

On Friday, December 20 at 9:30 AM, the final read on US Q3 GDP is printed. The Baker Hughes Rig Count follows at 2:00 PM.

As for me, after blowing out 1,200 Christmas trees, the Boy Scouts will be taking down the tree lot for the year. And who do they turn to when it comes to wielding a chain saw or sledge hammer?

Good luck and good trading.

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

December 10, 2019

Diary, Newsletter, Summary

Global Market Comments
December 10, 2019
Fiat Lux

Featured Trade:

(MAD HEDGE FUND TRADER ANNOUNCES STRATEGIC PARTNERSHIP WITH TASTYTRADE),
(A NOTE ON OPTIONS CALLED AWAY),
(MSFT), (TLT), (BA), (GOOGL), (SPY)

December 6, 2019

Tech Letter

Mad Hedge Technology Letter
December 6, 2019
Fiat Lux

Featured Trade:

(AUGMENTED REALITY IS HEATING UP),
(AAPL), (LITE), (QCOM), (NVDA), (ADSK), (FB), (MSFT), (SNAP)

Augmented Reality is Heating Up

Tech Letter

First, what is augmented reality for all the newbies?

Augmented reality is an interactive experience of a real-world environment where the objects that reside in the real world are enhanced by computer-generated perceptual information, sometimes across multiple sensory modalities.

Augmented reality (AR) went rival in 2016 when the Pokemon Go mania captivated everyone from children to adults.

No sooner than 2021, the AR addressable market is poised to mushroom to $83 billion - a sizeable increase from the $350 million in 2018.

Much like machine learning, corporations are learning to marry up this technology with their existing products supercharging the performance.

Ulta Beauty, for example, has acquired AR and artificial intelligence start-ups to help customers digitally test the final appearance of makeup before users purchase the product.

That is just one micro example of what can and will be achieved.

Looking deeper into the guts, Qualcomm (QCOM) is hellbent on making their chips a critical part of the puzzle.

The company is better known for a telecom and a semiconductor play, not often lumped in with a list of AR stocks.

Qualcomm is strategically positioned to capitalize on the integration of augmented reality in mainstream corporate business embedding their chips into the devices.

Maximizing Qualcomm’s future role in the industry, the company announced in 2018 that it would be developing a chipset specifically for AR and VR applications.

This broad-based solution will make it easier for other developers to bring new glasses to the marketplace.

Autodesk (ADSK) is one of my favorite software stocks and a best of breed of industry design.

They sell 3D rendering software to designers and creators by offering a platform in which they can transform 2D designs into digital models that are both interactive and immersive, creating compelling experiences for end-users.

Autodesk has an array of powerful software suites to augment virtually any application, such as 3ds Max, a 3D modeling program; Maya LT game development software; its automotive modeling program VRED; and Forge, a development platform for cloud-based design.

Facebook (FB) has been piling capital into AR for years.

CEO Mark Zuckerberg wants to create an alternative profit-driver and is desperate to wean his brainchild from the digital ad circus.

One example is Facebook’s Portal TV and its Spark AR which is the platform responsible for mobile augmented reality experiences on Facebook, Messenger, and Instagram.

It supplies the virtual effects for consumers to play around with, but it is yet to be seen if consumers gravitate towards this product.

Lumentum (LITE) is the leader in 3D-sensing markets developing cloud and 5G wireless network deployments.

They manufacture 3D sensor lasers that can be used with smartphones to turn handsets into a sort of radar. Sensors are clearly a huge input in how AR functions along with the chips.

CEO of Apple (AAPL) Tim Cook put it best when he earlier said, “I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you.”

He said that in 2016 and AR has yet to mushroom into the game-changing sector initially thought partly because the roll-out of 5G is taking longer than first expected.

Apple consumers will need to then adopt a 5G device or phone to really get the AR party started and that won’t happen until the backend of next year.

My initial channel checks hint that the Cupertino firm is planning a 5.4-inch model, two 6.1-inch devices, and one 6.7-inch phone, all of which will support 5G connectivity.

I surmise that Apple’s two premium devices will feature “world-facing” 3D sensing, a technology that could help Apple boost its augmented-reality capabilities and support other feature improvements on its priciest devices.

Apple has had a big hand in Lumentum's growth and will continue to buy their sensors, but other key component suppliers will get contracts such as Finisar, a manufacturer of optical communication components and subsystems.

Apple planned to debut AR glasses by 2020, but the rollout is now delayed until 2022.

They are clearly on the back foot with Microsoft (MSFT) further along in the process.

Microsoft already has a second iteration of its AR headset, HoloLens, and is compatible with several apps and has integration with Azure as well.

The head start of 2 years could really make a meaningful impact and might be hard for Apple to recover.

Facebook isn’t the only social media company going full steam into AR, Snap (SNAP) recently unveiled its newest spectacles, which feature AR elements.

Another application of AR is autonomous driving with Nvidia working on improving the driving experience by fusing AR with artificial intelligence.

Nvidia (NVDA) is already thinking about the next generation of AR technologies with varifocal displays, which improve the clarity of an object for a user.

It will take time to transform our relationship with AR, the infrastructure is still getting built out and many people just don’t have a device that will allow us to tap into the technology.

Investors must know that AR-related stocks will start to appreciate from the anticipation of full sale adoption and there could be a killer app that forces the mainstream user to take notice.

Until then, companies jockey for position and hope to be the ones that take the lion’s share of the revenue once the technology goes into overdrive.

December 2, 2019

Diary, Newsletter, Summary

Global Market Comments
December 2, 2019
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or 2020 IS ALREADY HAPPENING),
(TSLA), (X), (GE), (FCX), (SLB), (GOOGL), (MSFT), (GLD)

The Market Outlook for the Week Ahead, or 2020 is Already Happening

Diary, Newsletter

You know the melt-up that is going on in the stock market right now? That is your 2020 performance being pulled forward.

One thing I have noticed over the past half-century of trading is that when market participants agree on a direction, it gets accelerated. Once the traditional October selloff failed to show, it was pedal to the metal to achieve new all-time highs.

Traders have become so overconfident that they have already completed this year’s performance and are now working on next year's. They are in effect pulling performance forward from 2020.

This historic run is taking place in the face of year-on-year earnings growth that is zero. ALL of the 29% price appreciation in the S&P 500 (SPY) in 2019 has been due to multiple expansion, from 14 times earnings to 19 times, a 20-year high. Market multiples rising by 50% anytime is almost unprecedented in history. I can only recall that happening twice: in 1929 and 1999.

So, that leaves only two possibilities for 2020. Either the multiple rises to a new 20-year multiple high, say to 20, 21, or 22, or the stock market goes down.

With a trade war-induced global economic slowdown still unfolding, don’t expect any respite from a sudden earnings recovery. Enjoy 2019 because the more we go up now means the more we will go down in 2020.

Were you waiting for the euphoria to make a market top? This is it. Sharply rising markets in the face of sharply falling earnings can only end in tears.

Needless to say, risk in the stock market is very high right now.

Jay Powell gave the market another boost, promising to hit the Fed’s 2% inflation target, giving plenty of room for wage hikes. The last inflation reading was 1.7% YOY. He might as well have said Dow 29,000 by yearend. I wish it were always this easy.

Hong Kong stalled the rally with the passage of a pro-democracy support by congress, with sanctions. China is warning of “firm countermeasures.” That throws cold water on any trade deal for 2019. New all-time highs for stocks may have to take a vacation.

US Q3 GDP was revised up to 2.1%, an improvement of 0.2% from the last read. The trade war seems to be costing us 1% of growth a year or about one-third of the total. That’s why we’re getting such a strong stock market move on the possibility of a trade deal. No-deal means lookout below.

Durable Goods came in at 0.6% in October, a nine-month high and better than expected. What does this week’s spate of positive data means, the first in many months? Is the recession risk over? If so, how much is already in the price?

Stocks love a steepening yield curve, with long term interest rates rising faster than short term ones. It puts the recession talk on hold, if not in abeyance.

It’s time to go dumpster diving, as the upside breakout in the Russell 2000 demonstrated last week. So, it’s time to start looking at the forlorn and the ignored of this bull market, like US Steel (X), General Electric (GE), Freeport McMoRan (FCX), and Schlumberger (SLB). There are no fundamentals in any of these names, they’ve just been down for so long anything looks like up from here. The liquidity-driven bull market has to find some fresh meat to rotate into, even temporarily, or it will die.

S&P Case Shiller rose 3.2% in September, the third consecutive month of price increases. Only San Francisco is showing falling prices. Phoenix (6.0%), Charlotte (4.6%), and Tampa (4.5%) are showing the greatest prices rises. Only a shortage of inventory is preventing prices from rising faster, now at a record low of 3.9 months. The builders who went under ten years ago aren’t building anymore.

New Home Sales drop 0.7%, in October, but are still up a massive 31.6% YOY. Sales in the northeast and south plunged, while those in the Midwest and west rise. The seasonally adjusted annual rate is 733,000 units. The Median Home Price fell 3.6% to $316,700. A 30-year fixed-rate mortgage at 3.66% is a major factor.

Merger mania in drug land continues, with the Novartis takeover of The Medicines Co. for $9.7 billion. It wants to take on Amgen (AMGN), Regeneron (REGN), and Sanofi in the heart drug space. No wonder this is the top-performing sector since I launched the Mad Hedge Biotech and Healthcare Letter.

Tesla shattered, both windows and sales records with an incredible 250,000 cyber trucks sold in a week. It’s one of the largest consumer orders in history, second only to the Tesla Model 3 launch four years ago. I may get one myself to make the Lake Tahoe run on a single 500-mile charge. Keep buying (TSLA) on dips. It is the clearest ten bagger out there.

Who is the mystery gold (GLD) buyer? Someone made a massive bet in the options market that gold will rise above $4,000 an ounce in 18 months. It would take a 32% move just to get gold back to its old $1,927 high. If the trade war continues, we may get it.

This was a week for the Mad Hedge Trader Alert Service to burst upon new all-time highs. I know this sounds boring, but I made all the money long technology stocks. This is net a -2.16% loss on my short position in Tesla (TSLA). If I’d only held on two more days this would have been a big winner over the disappointment over the shocking Cyber truck design. My long positions have shrunk to my core (MSFT) and (GOOGL).

By the way, running out of positions at a market top is a good thing.

My Global Trading Dispatch performance held steady at +352.76% for the past ten years, pennies short of an all-time high. My 2019 year-to-date catapulted back up to +52.62%. We closed out November with a respectable +3.07% profit. My ten-year average annualized profit ground back up to +35.28%.

The coming week will be hot with the jobs data trifecta.

On Monday, December 2 at 8:00 AM, the ISM Manufacturing PMI for November is out.

On Tuesday, December 3 at 2:30 PM, the API Crude Oil Stocks are announced.

On Wednesday, December 4, at 6:15 AM, the private sector ADP Employment Report is published.

On Thursday, December 5 at 8:30 AM, the Weekly Jobless Claims are printed.

On Friday, December 6 at 8:30 AM, the November Nonfarm Payroll Report is released.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I am going to battle my way through the blizzards at Donner Pass this weekend to get back to the San Francisco Bay Area. There, I’ll be helping the local Boy Scout troop to set up their Christmas tree lot. The enterprise helps finance all the camping trips for the coming year.

Good luck and good trading.

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

November 25, 2019

Tech Letter

Mad Hedge Technology Letter
November 25, 2019
Fiat Lux

Featured Trade:

(AI HAS REACHED FARTHER THAN YOU THINK),
(AMZN), (MSFT), (AAPL)

AI Has Reached Farther Than You Think

Tech Letter

I was lucky enough to get my hands on the Deloitte Private Technology Trends report named, “Seizing Opportunity.”

I’ll break down some of the gems I took away that will give us insight into the current state of technology.

This might not be necessarily a new idea because artificial intelligence has been around for a while, but it certainly is gaining steam with respondents placing greater value on artificial intelligence to drive business results.

Firms are using AI for analysis automation 48% of the time in 2019 versus 30% in 2018, putting the responsibility on this technology to super-drive profits.

It’s not a surprise that big data analysts have become one of the most sought-after commodities in Silicon Valley.

It’s appropriate to say that the FANGs have pulled away from any resemblance of competition in 2019 and this if forcing many mid-market and private companies to view talent and emerging technologies as the x-factors to stay competitive.

Behemoth tech companies have the luxury of cheap access to capital to buy out competition or break it by throwing money at problems until they can copy the technology and scale it applying force multiplier ecosystems to cross-pollinate and intertwine services with each other.

These same companies buy back their own stock with cheap capital enriching stakeholders and management.

In fact, Apple (AAPL) is buying back so much stock that it will have bought out its entire trove of stock by 2030 to effectively go private.

Deloitte found that 43% say they are spending more than 5% of their firm’s revenue on technology, a 15-point increase since 2016.

More than half of respondents forecast annual growth rates of 11% or higher and 68% plan to hire to harness the emerging technology.

Another trend that will pick up steam that I have noted before is the predictive analytics and legacy system modernization, and this is topping private companies’ investment priorities list.

In fact, the number of private companies surveyed using predictive analytics to diagnose business results skyrocketed 65% over the past five years.

Firms are prioritizing information security risks, the adoption of 5G technology, and business innovation over the next 365 days.

Digital disruption is the norm du jour.

Firms expect shifts in sales (55%), marketing (50%), and supply chain roles (49%) in the next 3-5 years.

In preparation, 54% of mid-market and private companies are re-skilling employees and 52% are reconfiguring jobs to accommodate this shift.

Also, 72% believe internal development and reskilling is a method to enhance employees’ potential because of the exorbitant costs of talent acquisition.

Over two-thirds (69%) will construct new talent acquisition strategies to marry it up with the trend of hiring in data analytics, AI and other emerging technologies.

In a major reversal, respondents are less likely to seek out crowdsourcing and gig economy workers because these types of workers are less effective than full-time workers and have high turnover rates.

More than 32% of private companies acknowledge that embedded value is trending towards machine learning, robotic process automation and other cognitive capabilities, a 12% increase from 2018’s survey results.

Although executives are experiencing greater benefits from AI technologies, more than one-half of respondents (55%) are worried about the use of AI, particularly when it comes to HR decision-making.

Personally, I believe using AI in HR is mostly flawed.

In short, firms are doubling down on “emerging technologies” and to combat the superior business models of big tech companies.

They almost have no choice.

These conditions favor the status quo of behemoth tech titans who can invest in machine learning and artificial intelligence because of their cheap sources of capital.

From the data, smaller companies are desperate to hang on to their talent because of a shrinking talent pool and high talent acquisition cost.

The belief that leveraging foundational technologies to springboard revenue is only getting stronger. This favors the goliaths at the top because they have the resources to integrate these levers unlike companies further down the food chain.

This article could almost signal why investors can’t be short Apple (AAPL), Microsoft (MSFT), and Google (GOOGL).

They are at the vanguard of every major technology trend and they have demonstrated that they are definitely “seizing opportunity.”