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The Road Out of Silicon Valley

In a new study, 44% of Millennials plan to move out of the Bay Area in the “next few years.”

In the same study, 8% of Millennials will move out of the Californian tech peninsula within the next 365 days.

Tech companies are in serious danger of stagnating because they won’t be able to hire the talent needed to keep their companies afloat while the number of foreign HB-1 visas has dried up.

All of this could come home to roost and early cracks can be found in the local housing migratory trends.

The robust housing demand, lack of housing supply, mixed with the avalanche of inquisitive tech money has made living with a roof over your head a tall order.

The area has also become squalid like some third world countries due to the homeless problem that is growing faster than any software company.

Salesforce Founder and CEO Marc Benioff has lamented that San Francisco, where ironically he is from, is a diabolical “train wreck” and urged fellow tech CEOs to “walk down the street” and see it with their own eyes to observe the numerous homeless encampments dotted around the city limits.

The leader of Salesforce doesn’t mince his words when he talks and beelines to the heart of the issues.

In condemning large swaths of the beneficiaries of the Silicon Valley ethos, he has signaled that it won’t be smooth sailing forever.

He has also urged companies to transform their business model if they are irresponsible with user data.

The tech lash could get messier this year because companies that go rogue with personal data will face a cringeworthy reckoning as government policy stiffens.

I have walked around the streets of San Francisco myself.

Places around Powell Bart station close to the Tenderloin district are eyesores littered with used syringes that lay in the gutter.

South of Market Street (SoMa) isn’t a place I would want to barbecue on a terrace either.

Summing it up, the unlimited tech talent reservoir that Silicon Valley gorged on isn’t flowing anymore because people don’t want to live there anymore.

This is exactly what Apple’s $1 billion investment into a new tech campus in Austin, Texas, and Amazon adding 500 employees in Nashville, Tennessee are all about.

Apple also added numbers in San Diego, Atlanta, Culver City, and Boulder just to name a few.

Apple currently employs 90,000 people in 50 states and is in the works to create 20,000 more jobs in the US by 2023.

Most of these new jobs won’t be in Silicon Valley.

Jobs simply flock to where the talent is.

The tables have turned but that is what happens when the heart of western tech becomes unlivable to the average tech worker earning $150,000 per year.

Sacramento has experienced a dizzying rise of newcomers from the Bay Area escaping the sky-high housing.

Millennials are reaching that age of family formation and they are fleeing to places that are affordable and possible to take the first step onto the property ladder.

These are some of the practical issues that tech has failed to address, and part of the problem with unfettered capitalism which doesn’t consider quality of life.

No wonder why Silicon Valley real estate has dropped in the past year, people and their paychecks are on the way out.

October 16, 2019

Diary, Newsletter, Summary

Global Market Comments
October 16, 2019
Fiat Lux

Featured Trade:

(A NOTE ON ASSIGNED OPTIONS OR OPTIONS CALLED AWAY),
(MSFT)
(DECODING THE GREENBACK),

October 16, 2019

Tech Letter

Mad Hedge Technology Letter
October 16, 2019
Fiat Lux

Featured Trade:

(IS 3D PRINTING A WASTE OF SPACE?)
(SSYS), (ETSY), (MSFT), (BA), (NFLX), (GE), (LMT)

A Note on Assigned Options, or Options Called Away

Diary, Newsletter

With stock market volatility greatly elevated and trading volumes through the roof, there is a heightened probability that your short options position gets called away.

If it does there, is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit on your position.

Most of you have short options position, although you may not realize it. For when you buy an in-the-money call option spread, it contains two elements: a long call and a short call. The short call can get assigned or called away at any time.

You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it.

The 5:30 AM phone call was as shrill as it was urgent.

A reader had employed one of my favorite strategies, buying the Microsoft (MSFT) November 2018 $90-$95 in-the-money vertical call spread at $4.50.

He had just received an email from his broker informing him that his short position in the (MSFT) November $95 calls was assigned and exercised against him.

He asked me what to do.

I said, “Nothing.”

For what the broker had in effect done is allow him to get out of his call spread position at the maximum profit point 20 days before the November 16 expiration date.

All he had to do was call his broker and instruct him to exercise his long position in his November $90 calls to close out his short position in the $95 calls.

Calls are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.

In other words, he bought (MSFT) at $90 and sold it at $95, paid $4.50 cents for the right to do so, his profit is 50 cents, or ($0.50 X 100 shares X 22 contracts) = $1,100. Not bad for a nine-day limited risk play.

Sounds like a good trade to me.

Weird stuff like this happens in the run-up to options expirations.

A call owner may need to sell a long stock position right at the close and exercising his long November $95 calls is the only way to execute it.

Ordinary shares may not be available in the market, or maybe a limit order didn’t get done by the stock market close.

There are thousands of algorithms out there, which may arrive at some twisted logic that the puts need to be exercised.

Many require rebalancing of hedges at the close every day, which can be achieved through option exercises.

And yes, calls even get exercised by accident. There are still a few humans left in this market to blow it.

And here’s another possible outcome in this process.

Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.

This generates tons of commissions for the broker, but is a terrible thing for the trader to do from a risk point of view, likely generating a loss by the time everything is closed and netted out.

Avarice could have been an explanation here, but I think stupidity, poor training, and low wages are much more likely.

Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.

This exercise process is now fully automated at most brokers, but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

Some may also send you a link to a video of what to do about all this.

If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.

Professionals do these things all day long, and exercises become second nature, just another cost of doing business.

If you do this long enough, eventually you get hit. I bet you don’t.

Is 3D Printing a Waste of Space?

Tech Letter

If you need a new investment theme – here’s one.

3D printing.

Yes, the same 3D printing that was once considered a raging but hopeless fad.

A lot has changed since then.

Early adopters were largely cut down at the knees as they tried to traverse the rocky terrain from a niche market to going full out mainstream.

Production complications and the lack of specialists in the industry meant that problems were rampant and nurturing an industry from scratch is harder than you think.

Believe me, I’ve been there and done that.

It is time to stand up and take notice of 3D printing, this time it is here to stay.

Certain tech companies love this technology like e-commerce company Etsy (ETSY) who focuses on personalized handcrafts.

The cost of production doesn’t change whether you’re producing one item or a million because of the economies of scale.

The previous 3D printing bonanza was a frenzy and this corner of tech became known for the use of buzzwords representing the potential to reinvent the world.

With lofty expectations, there was a natural disappointment when outsiders understood growing pains were part of the critical evolution instead of a direct route to profits.

The initial goal was to democratize production which sounds eerily similar to bitcoins mantra of democratizing money.

The way to do this was to make it simple to produce whatever one wishes.

That would assume that the general public could pick up professional production 3D printing skills on arrival.

That was wishful thinking.

The truth was that applying 3D printers was tedious.

Issues cropped up like faulty first-generation hardware or software -problems that overwhelmed newbies.

Then if everything was going smoothly on that front, there was the larger issue of realizing it’s just a lot harder to design specific things than initially thought without a deep working knowledge of computer-aided software (CAD) design.

Most people know how to throw a football, but that doesn’t mean that most people can be Super Bowl quarterback Tom Brady.

The high-quality 3D printing designs were reserved for authentic professionals that could put together complicated designs.

The move to compiling a comprehensive library will help spur on the 3D printing revolution while upping the foundational skill base.

Then there is the fact that 3D printing technology is heaps better now than it once was, and the printing technology has come down in price making it more affordable for the masses.

These trends will propel broad-based adoption and as the printing process standardizes, more products can rely on this technology from scratch.

The holy grail of 3D printing would be 3D printing on demand, but imagine this on-demand 3D printing would function to personalize a physical product on the spot.

Think of a hungry customer walking into a restaurant and not even looking at a menu because one sentence would be enough to trigger specific models in the database that could conjure up the design for the meal.

This would involve integrating artificial intelligence into 3D printing and the production process would quicken to minutes, even seconds.

At some point, crafting the perfect meal or designing a personalized Tuscan villa could take minutes.

The 3D printing industry is reaching an inflection point where the advancement of the technology, expertise, and an updated production process are percolating together at the perfect time.

The company at the forefront of this phenomenon is Stratasys (SSYS).

Stratasys produces in-office prototypes and direct digital manufacturing systems for automotive, aerospace, industrial, recreational, electronic, medical and consumer products.

And when I talk about real pros who have the intellectual property to whip out a complex CAD-based 3D design, I am specifically talking about Stratasys who have been in this business since the industry was in its infancy.

And if you add in the integration of cloud software, 3D printing would dovetail nicely with it.

All the elements are in perfect in place to fuel this industry into the mainstream.

Take for example airplanes made by Boeing (BA) and Airbus - 3D printer-designed parts comprise only 0.1% of the actual plane now.

It is estimated that 3D printed design parts could potentially consist up to 25% of the overall plane.

These massive airline manufacturers like Boeing (BA) have profit margins of around 15% to 20%, and carving out more 3D printer-designed parts to integrate into the main design will boost profit margins close to 60%.

The development of the 3D printing process into aerospace technology is happening fast with Boeing inking a multi-year collaboration agreement with Swiss technology and engineering group Oerlikon to develop standard processes and materials for metal 3D printing.

Any combat pilot knows who Oerlikon is because they are famed for building ultra-highspeed machines to shoot down, you guessed it, airplanes and missiles.

They will collaborate to use the data resulting from their agreement to support the creation of a standard titanium 3D printing processes.

GE’s Aviation’s GEnx-2B aircraft engine for the Boeing 747-8 is applying a 3D printed bracket approved by the Federal Aviation Administration (FAA) for the engine, replacing a traditionally manufactured power door opening system (PDOS) bracket.

With the positive revelations that the (FAA) is supporting the adoption of 3D printing-based designs, GE has already started mass production of the 3D printed brackets at its Auburn, Alabama facility.

Defense companies are also dipping their toe into the water with aerospace company Lockheed Martin (LMT), the world’s largest defense contractor, winning a $5.8 million contract with the Office of Naval Research to help further develop 3D printing for the aerospace industry.

They will partner up to investigate the use of artificial intelligence in training robots to independently oversee the 3D printing of complex aerospace components.

3D printed designs have the potential to crash the cost of making big-ticket items from cars to nuclear plants while substantially shortening the manufacturing process.

As it stands, Stratasys is the industry leader in this field and if you believe in this long term then this stock would be for you.

It’s nonetheless still a speculative punt but a compelling pocket of the tech industry.

October 1, 2019

Diary, Newsletter, Summary

Global Market Comments
October 1, 2019
Fiat Lux

Featured Trade:

(LAUNCHING THE NEW MAD HEDGE BIOTECH AND HEALTHCARE LETTER)
(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)

September 23, 2019

Tech Letter

Mad Hedge Technology Letter
September 23, 2019
Fiat Lux

Featured Trade:

(THE COMING REVOLUTION IN 5G)
(MSFT), (TSM), (AVGO)

September 23, 2019

Diary, Newsletter, Summary

Global Market Comments
September 23, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or GRIDLOCKED),
(MSFT), ($INDU), (SPY), (TLT), (GM)

The Market Outlook for the Week Ahead, or Gridlocked

Diary, Newsletter, Research

Market’s are gridlocked.

Traders don’t want to chase the market at an all-time high on top of a 2,000-point rally. They don’t want to sell short either since a Tweet could come out at any time triggering a squeeze.

Will the trade war continue for another week or a year?

On top of all that, we have a president who attempts to manipulate the market more than any in history.

And here is the problem. While the major indexes remain dead unchanged over the past 18 months, earnings have been falling. That has made them more expensive than at any time over the past several years.

And this is in the face of an onslaught of negative economic data that continues to deteriorate by the day, all caused by the trade war.

So, as a result, there is nothing to do here. The market is too high to buy and too low to sell. Clients call me with trade ideas, and I tell them they are reaching. There is nothing worse than reaching for the marginal trade when there is really nothing to do.

At least I’ll have something to do in the coming week. I’ll be launching the Mad Hedge Biotech and Health Care Letter, the newest addition to our family of research services. In addition to technology, I expect Biotech and Health Care to be one of the top-performing sectors in the coming decade.

I have taken out a full-time researcher in the field who has been grinding out reports for me since January 1. The invitation to the webinar should reach you in a few days where I will explain why keeping up with this sector is so important.

There is no law that says you have to have a trade on every day of the year. Cash is beautiful. Better than that, cash has option value. It’s worth a fortune to have dry powder when markets meltdown or melt-up. You get to catch other investors’ trades when they are puking. That is the best time ever to make money.

When my four technology positions expired at their maximum profit point on Friday, I celebrated. I went down to a bankruptcy sale for an antique store in Berkeley and bought a vintage Champaign magnum bottle for $10.

The week was kicked off by mass drone strikes that took out Saudi oil production, axing 6 million barrels a day off the global market. Half of that will be back in a day. Oil prices spike $10, the largest one-day move in history. This is clearly the end result of the US unilaterally pulling out of the US Iran Nuclear Agreement and the economic sanctions that followed, thus inviting retaliation.

General Motors (GM) workers struck, with 48,000 hourly workers hitting the picket lines. The last strike in 1998, also at a market top, lasted for 54 days. Could be this the long-awaited inflationary run-up in wages? Expect many more strikes to come.

China’s economy slowed, with Industrial output up 4.4%, the slowest since 2002. Trade war impacts will keep hitting the economy for months to come. The bad news? Business is not responding to recent stimulus and, with 70% of the country’s oil originating in Saudi Arabia, they now have a bigger headache.

Recreational Vehicle sales are falling off a cliff, down 22% YOY, as consumer cut back discretionary spending. It’s another reliable pre-recession indicator.

Recession fears are the highest in a decade, according to the Bank of America Merrill Lynch fund manager survey. Some 38% of managers are making the bear call versus 34% in August. Only 7% of managers expect value to outperform growth over the next 12 months.

Some 53% of CFOs think we’ll be in a recession in a year, and 67% by end 2020. These are the highest pessimism numbers in a decade. Germany already in recession is the largest concern, followed by a slowing China. It’s all linked. We are all one global economy, like it or not.

Philly Fed plunged, from 16.8 to 12.0, indicating fading business confidence. The trade war universally gets the blame. Notice how nervous everyone is getting.

Apple got tagged with a $14 billion fine in another “not invented here” penalty issued by the Irish government. It’s another attack on American big tech. Apple says they followed Irish tax law to the letter.

The Fed cut a quarter but talks down future rate hikes. Buy the rumor, sell the news. Probably no rate cut for October, so December is the next time we get a swing at the piñata. This will have zero effect on the economy, but further punishes savers.

Microsoft (MSFT) announced a $40 billion share buyback and raises its dividend by 11%. It’s a huge positive for the company and the market in general. I’ll try to buy the Thursday opening if it doesn’t open up at a stupid price. Buy Seattle real estate….and more Microsoft. Bill Gates’ creation has bought back 25% of its shares over the past decade.

The Mad Hedge Trader Alert Service still doing well in this indecisive market. My Global Trading Dispatch reached a new all-time high of 336.07% and my year-to-date ground up to +35.83%. My ten-year average annualized profit bobbed up to +34.57%.

I took profits in my long bond position (TLT) earlier in the week, capturing a four-point rally there. I am left with my short position in oil (US), which needs a $9 a barrel move against it to lose money. That should be fine as long as there is not another attack on the Saudi oil fields.

It is interesting to note that this ramped up the implied volatilities on oil options going into the Friday close over fears of just such an event. We will get all that back at the Monday morning opening….as long as the weekend proves peaceful.

On Monday, September 23 at 8:30 AM, the Chicago Fed National Activity Index for August is out.

On Tuesday, September 24 at 9:00 AM, the S&P Case-Shiller National Home Price Index is updated, for July.

On Wednesday, September 25, at 8:30 AM, we learn August New Home Sales.

On Thursday, September 26 at 8:30 AM, the Weekly Jobless Claims are printed. We also obtain the final read for Q2 GDP.

On Friday, September 27 at 8:30 AM, the August Durable Goods is printed. The Baker Hughes Rig Count is released at 2:00 PM.

As for me, I’ll be doing a ten-mile backpack through Point Reyes National Seashore with a 60-pound pack and feasting on freeze-dried food in front of a campfire. Got to remain bootcamp-ready. You never know when Uncle Sam is going to come calling again.

Good luck and good trading.

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

The Coming Revolution in 5G

Tech Letter

5G is overhyped but that doesn’t mean everyone will be a loser.

The shift to fifth-generation wireless technology, or 5G, will offer investors numerous compelling investment opportunities.

It has been predicted that 5G phone shipments will rise from 17 million this year to 130 million in 2020 and 327 million in 2021.

However, on the flip side of it, 5G, especially for the technically astute consumer and at current prices, is oversold.

At least for 2020.

Some percentage of teens and students will want to watch movies and play high-bandwidth games on their phones but when they discover the data costs, they will retreat from such purchases.

Also, many who hype 5G aren't aware of the technical limitations especially for those outside of certain metro areas.

It could turn out to be a vanity buy for some or most.

It will benefit businesses, of course, but not the majority of the cell phone market. Certainly not in the US.

Even for me, everything I use on my smartphone wouldn’t need 5G.

If there is no noticeable effect, then do consumers really need this technology?

I would say not until something more comes out that requires us to need 5G and I do not see that on the horizon.

Back in the world of the stock market, many analysts understand that RF (radio frequency chip) supply chain companies are compelling in their new growth opportunities for 5G phones.

Even if many consumers do not need 5G, many device makers will splurge on their supply chain to get there, meaning chip companies who sell 5G components will gain.

The marketing of 5G entails the standard hyping-up of the shift to 5G.

And industry participants would say it is substantially important to the semiconductor and telecom industries, but it will take time to absorb on the consumer side.

Analysts expect 5G to deliver speeds 10 to 40 times faster than current 4G LTE networks. Its lower latency promises to enable new applications from augmented reality and automated factories to self-driving and cloud gaming.

But as I referenced above, there are only a handful of consumers that need cloud gaming and augmented reality.

Automated factories work with the current speed of technology and in a global slowdown, corporates will want to wait for a healthier environment to initiate a new CAPEX cycle.

Here are some chip stocks that supply chain could benefit from.

Taiwan Semiconductor Manufacturing (TSM) is a stock with thematic drivers that can potentially benefit from the upcoming 5G renaissance and global supply chain shifts.

TSM has a large foundry and advanced chip-making technology leadership.

Broadcom (AVGO) will also become a vital winner of 5G smartphone adoption while supplying specialized processors for 5G front and back haul.

Broadcom will supply chips to both Apple and Samsung for their 5G smartphones.

The rapid run of chip shares could have more to go for the end of the year as investors have front-run chip stocks for the past few months.

However, I do believe that the downdraft in smartphone demand and connected devices will hurt the end product sales.

Consumers will hold off on buying 5G-supported Huawei, Samsung, and Apple products, meaning chip stocks could stall out after this nice run.

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