(MSFT) Archives

Next Stop is $2 Trillion

Another win for big tech.

Apple (AAPL) is the first company in America to have a trillion-dollar market cap and won't be the last as Amazon (AMZN) is close behind.

This also opens up the door for one of our favorite companies Microsoft (MSFT), which will shortly cross the $1 trillion threshold as well.

The milestone underscores the reliability and power of the tech sector that has propped up this entire market in 2018 as we continue the late stage cycle of the nine-year bull market.

Apple has entered into a hyper-charged expansion phase, and I will explain how this will boost shares to new heights.

The Mad Hedge Technology Letter has been hammering away on the software and services narrative since its inception.

As legacy companies are pummeled in the financial markets, the cloud has enabled a revolutionary industry catering toward annual subscriptions of all types.

Users no longer have to store gobs of data on computers. The cloud allows the data to be stored on remote data servers giving access to the information from anywhere in the world with an Internet connection.

A plethora of modern hybrid apps boosting productivity integrated with the cloud offers business a new-found way to collaborate with coworkers around this increasingly multicultural, multilingual, and globalized world.

Apple is perfectly placed to take advantage of the current technology climate and will wean itself from the image of being a hardware company.

Investors wholeheartedly approve of the conscious move to bet the farm on service and subscriptions.

After Apple's earnings came out, the stock traded up whereas in past quarters, the total sales unit was the crucial number investors hung their hat on and the stock would dip.

Apple missed iPhone total sale units registering 41.3 million compared to the expected 41.79 million units.

This slight miss in the past was enough for the stock to sell off on and instead the stock rose 3%.

This is the new Apple.

A software services company.

Investors can feel at peace that iPhone sales aren't growing. It's not that important anymore.

Apple's software and services segment pocketed $9.55 billion in revenue, a 31% jump YOY from $7.27 billion.

This has been in the making for a while as software and services has been a five-star performer for the past few quarters.

However, the performance is material now and the pace of improvement will take Apple into the next phase of hyper-growth.

This is all good news for the stock price.

Software and services revenue now comprise 17.9% of Apple's total revenue.

By year-end, this division could topple the 25% mark.

In the earnings call, Apple CEO Tim Cook was smitten with the software and services growth saying this particular revenue will double by 2020.

In the next few years, software and services will eclipse the 40% mark, all made possible inside an incredibly sticky and top-quality ecosystem.

The iPhone continues to be the best smartphone the market has to offer. If you marry the best hardware with top-quality software, this stock will chug along to higher share prices unhindered.

As the technology sector matures, the flight to quality becomes even more glaring.

The inferior platforms will be found out quickly heightening the risk of massive intraday sell-offs and revenue-depleting penalties.

Facebook and Twitter have seen 20% sell-offs hitting investors in the mouth.

These platforms have issues rooting out the nefarious elements that seek to infiltrate its operations and manipulate the platform for self-serving interests.

Apple does not have this problem. Neither does Microsoft, Amazon, Netflix (NFLX) or Salesforce (CRM), and I will explain why.

When you offer services for free such as Facebook (FB) and Twitter (TWTR) do, you get the good, bad, and ugly bombarding the system.

Even though it's free to use these platforms, Facebook and Twitter must spend to make it useable for the good forces that made these companies into tech behemoths.

Instead of rooting out these rogue elements, they turned a blind eye describing their businesses as a distribution system and were not accountable.

Then sooner or later one of the evil elements would get these companies in hot water. It happened.

Big mistake, and the chickens are coming home to roost.

The flight to quality means avoiding public tech companies that only offer free services.

You pay for what you get.

Alphabet also has seen its free model penalized twice in Europe with hefty fines, and it probably won't be the last time.

Play with fire and you get burned.

It also offers Cook the moral high road, allowing him to non-stop criticize the low-quality platform companies, mainly Facebook, because it makes the whole tech sector look bad.

The bite back against technology in 2018 is largely in part due to these low-quality free platforms manipulating user data to ring in the profits.

Amazon has been public enemy No. 1 for the Washington administration but not to the public because the loathing of Amazon is largely a personal issue.

Amazon improves the lives of customers by giving users the best prices on the planet through its comprehensive e-commerce business.

Apple now constitutes 4% of the S&P 500 index.

Investors have been waiting for Apple's Cook to sweep them off their feet with the "next big thing."

Even though nearly not as sleek and sexy as a smartphone, the software and services unit are it.

Apple doubling down on high quality that I keep mumbling about shows up in average selling price (ASP) of the iPhone, which destroyed estimates of $694, coming in at $724 per unit.

The bump in (ASP) signals the high demand for its higher-end iPhone X model over the lower-tiered premium smartphones.

The iPhone X is the best-selling iPhone model because customers want the best on the market and will pay up.

The success of the iPhone X lays the pathway for Apple to introduce an even more expensive smartphone in the future with better functionality and performance.

If Apple can continue innovating and producing the best smartphone in the world, the price increases are justified, and demand will not suffer.

Perusing through some other parts of the earnings report, cloud revenue was up 50% YOY.

Apple pay has tripled in the volume of transactions YOY surpassing the billion-transaction mark.

China revenue has stayed solid even with the mounting trade tension. I have oftentimes repeated myself in this letter that Apple is untouchable in China because it provides more than 4 million jobs to local Chinese directly and indirectly through Apple's ecosystem.

This prognosis was proved correct when Apple announced revenue in China of $9.55 billion, a spike of 19% YOY.

Even though much of Apple's supply chain remains in China, Beijing isn't going to take a hammer and smash it up risking massive social upheaval and public fallout. In many ways, Apple is an American company masquerading as a Chinese one.

As for the stock price, the explosion to more than $208 means that Apple is overbought in the short term.

If this stock dips back to $200, it would serve as a reasonable entry point into this record-breaking hyper-growth software and services company.

And with the $234 billion in cash planned to be deployed in Apple's capital reallocation plan, the biggest hurdle is the federal daily limit Apple has in buying back its own stock according to Apple CFO Luca Maestri.

Even the problems Apple has right now are great.

Apple's Path to $1 Trillion

________________________________________________________________________________________________

Quote of the Day

July 31, 2018

Diary, Newsletter

Global Market Comments
July 31, 2018
Fiat Lux

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(AMZN), (GOOG), (DELL), (MSFT), (EBAY),
(MY DATE WITH HITLER'S GIRLFRIEND)

July 30, 2018

Diary, Newsletter

Global Market Comments
July 30, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or POURING GASOLINE ON THE FIRE),
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The Market Outlook for the Week Ahead, or Pouring Gasoline on the Fire

Diary, Newsletter, Research

Pour gasoline on a fire and you get a reaction. It's a simple matter of physics. That is the natural result of hitting the economy with tax cuts, fiscal stimulus, and low interest rates all at once. But at what price?

Of course, the headline number of the week was the first read on Q2 GDP growth, which came in at a strong 4.1%, the hottest number in four years. What was one of the biggest contributors? Soybean sales, as buyers rushed to beat the imposition of retaliatory Chinese tariffs. Consumers also hit the stores hard, spending their rising by a robust 4%.

The big question now is how much of this is sustainable? The answer is probably not much, which leaves investors with the queasy feeling that by coming in now they risk buying the absolute peak in the stock market. By temporarily pulling forward so much growth you may be creating a growth hole in Q3. So better mark your calendars now.

Q2 almost always delivers a string rebound from a usually weak Q1. The tax cuts delivered a one-time-only boost. But the investment spending that the administration had hoped for hasn't materialized, with a disproportionate portion of corporate profits going into share buybacks instead. Inventories are rising sharply, which is always bad.

We'll know for sure in a year when a recession will most likely begin. And remember, this extra growth is at the expense of an increase in the national debt by 10%, from $21 trillion to $23 trillion. And that is definitely NOT sustainable, but everyone in the world seems to have forgotten that, except me!

Interestingly, the report placed the current inflation rate dead on the Fed's target at 2.0%. That is a guarantee that any continued economic strength will be offset by rising interest rates.

The Facebook (FB) earnings highlighted the poor risk/reward of buying tech stocks at these elevated levels. Facebook shares plunged by 20% on their earnings announcement, creating the largest single day loss of market capitalization in history, some $120 billion. It was obviously a "kitchen sink" quarter.

If you get an earnings beat, as you did with Microsoft (MSFT) and Amazon (AMZN), you get a 2-, 3-, 4% pop in the stock price. If you disappoint, as did Facebook, Netflix (NFLX), and Twitter (TWTR), they crater by 10% to 20%. It is all typical end-of-cycle price action.

On the other hand, Amazon knocked the cover off the ball with its earnings, which came in at double analyst forecasts. The company is about to reach my end 2018 target of $2,000 a share. That is double the February lows.

Amazon Web Services delivered a stunning $6.1 billion quarterly revenue, up 49% YOY. Advertising is now becoming a major factor, as the company challenges Google (GOOG) and Facebook. For more on the longer-term prospects of Jeff Bezos's incredible company please see the special report that I published yesterday.

Bonds (TLT) continued their moribund price action, barely eking out a gain in yields to 2.97%. Either they are already discounting the next recession, are flooded with cash from a global QE hangover, or are getting a nice flight to safety bid brought on by multiple trade wars. Most likely it is all three.

Better to opine from the sidelines than to attempt to trade in the least volatile bond market conditions in 30 years.

As for gold, it continues to be a trader's worst nightmare as it plums new 2018 lows. Clearly, globally rising interest rates are not of what bull markets in gold are made. It doesn't help that Venezuela continues to hammer the market by liquidating its entire gold reserves on its way to national bankruptcy. Whenever distress liquidations take place, they are bad for everyone, not just the seller. Competition from crypto currencies for the speculative dollar doesn't help either.

As I have been sitting on top of an Alp contemplating the future and out of the markets, my 2018 year-to-date performance remains unchanged at an eye-popping 24.82% and my 8 1/2- year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.

It will be a big week on the data front, with an FOMC Meeting and an onslaught of jobs data.

On Monday, July 30 at 10:00 AM we obtain the June Pending Home Sales.

On Tuesday, July 31 at 9:00 AM EST, then we get the May S&P CoreLogic Case-Shiller National Home Price Index.

On Wednesday, August 1 at 2:00 PM, the Fed announces its decision on interest rates. Given the hot 4.1% Q2 GDP report, another 25-basis point rate rise is entirely possible.

Thursday, August 2, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 9,000 last week to 219,000.

On Friday, August 3 at 9:15 AM EST we get the July Nonfarm Payroll Report. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, the highlight of the week was being handed the keys to the City of Zermatt by the mayor for visiting for the 50^th year. Yes, I camped out here at the Youth Hostel in 1968. Also, with the honor came a Swiss Army knife with my name on it and a beautiful 10-pound coffee table book outlining the route I usually take to the Matterhorn summit.

I am now contemplating my return to the U.S., which is always hellish. It will require two trains (to Visp and Geneva), two flights (to Amsterdam and San Francisco), the last one of which lasts a punishing 10 1/2 hours. Then there is the eight hours of jet lag to deal with when I get home. So, I'll be getting up at 2:00 AM for a while. During those days I will be posting some of my favorite pieces from the past.

Still, to see the 14,692-foot Matterhorn from where I am sitting in the brilliant sunshine in all its glory, listening to an Alpine river rushing outside my window, and watching the swaying pines, it is all worth it.

Good luck and good trading.

July 25, 2018

Diary, Newsletter

Global Market Comments
July 25, 2018
Fiat Lux

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($INDU), (TLT), (GLD), (GOOGL), (FB),
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July 25, 2018

Tech Letter

Mad Hedge Technology Letter
July 25, 2018
Fiat Lux

Featured Trade:
(PICHAI YOURSELF, EARNINGS ARE REALLY THAT GOOD),
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Pichai Yourself, Earnings Are Really that Good

Tech Letter

Google Translate, Alphabet's (GOOGL) free, multilingual machine, foreign language translation service, translates an unimaginable143 billion words per day.

These were one of the pearls divulged in the conference call from Google's CEO Sundar Pichai.

A bump in usage coincided with the 2018 World Cup in Russia, and in the age of low-cost airfare and overpopulation, it could be Alphabet's new cash cow.

Google Translate has the potential to morph into one of the premier foreign language applications used by anyone and everyone.

Forget about the Amazon effect, the Alphabet effect could be just as pungent, albeit away from the trenches of e-commerce.

Thank goodness the application is still ad-free.

No doubt it would be inconvenient to sit through a 15 second ad while interacting with a concierge at a bed and breakfast in the South of France.

Analysts did not sound out Pichai's plans for Google Translate, but he did mention there are some monetization opportunities on the horizon.

The latest earnings report is the most recent indication that the FANGs along with Microsoft are pulling away from the rest.

The equity price action in 2018 vindicates this fact with more than 80% of the gains spread around just a few high caliber tech names.

Is this fair? No. But life isn't fair.

The too slow too late regulation that was supposed to put a cap on the vaunted FANG group has had the opposite effect, squeezing the small guy out of the picture.

The runway is all clear for the FANGs, and the only way they will be stopped is if they stop themselves or an antitrust ruling.

This all adds up to why Alphabet has been a perennial recommendation for the Mad Hedge Technology Letter.

Duopolies are few and far between and monopolies even rarer.

They are great for earnings and as the global digital ad pie grows, it falls down to Google's bottom line.

On the news of stellar earnings, Facebook shares jumped higher in aftermarket trading and powered on to trade around 5% the following day.

Expect a great earnings report from Facebook with robust ad revenue growth.

Nothing less would be a failure of epic proportions.

The migration to mobile is real and investors need to understand analysts cannot keep up with the rising year-end targets in these shares.

Alphabet had a high bar over which to pole vault, and it still managed to beat it handily.

And the $5 billion fine for bundling its in-house apps on Android fell on deaf ears.

Alphabet has $102 billion in the coffers, and $5 billion will do nothing to materially affect the company.

The cash reserves are up from $34 billion in 2010.

The market trampled on any sniff of a risk-adverse sentiment and powered into the green with the Nasdaq reaching another all-time high.

Let's not get too carried away. Alphabet's bread and butter is still its digital ad business with Alphabet CFO Ruth Porat confirming this fact saying, "One of the biggest opportunities for investment continues to be in our ads business."

Alphabet still breaks off 86% of revenue from its distinguished ad business.

"Other" is a category commingling Google Cloud, Google Play, and hardware that only comprised 13 percent of total revenue.

"Other Bets" brings up the rear with 1% of total revenue comprising Waymo, Alphabet's self-driving unit, which is an industry leader putting Tesla and Uber in their place.

Waymo plans to shortly roll out a massive commercial operation. Along with Google Translate, it could carve out a nice position in Alphabet's portfolio going forward.

The most important metric was Alphabet's total ad revenue, which it locked in at $28.1 billion, a 23.9% YOY improvement.

Aggregate paid clicks, a model in which the advertiser pays Google for a user to click an ad, has been steadily rising to 58%, up from 52% from the same time last year.

The masterful efficiency circles back to Google's ad tech team, which is by far the best in the business and has outstanding management.

The Cloud is an area that Alphabet highlights as a place for improvement.

Alphabet's cash war chest allows the company to throw hoards of cash at a problem. When mixed with brilliant management it usually works out kindly.

CFO Porat mentioned that costs were particularly higher in the quarterly head count because of large investments in cloud talent.

Google is tired of playing third fiddle to Amazon (AMZN) and Microsoft (MSFT), and views enhancing the enterprise business as imperative.

This explains Alphabet's head count surge to more than 89,000 employees, sharply higher than the 75,600 employed a year earlier.

Every FANG and high-tier tech company is spending its brains out to compete with each other.

Expanding data centers is not cheap. Neither are the people to deploy it.

Alphabet has the cash to compete with the Amazons and Apples (AAPL) of the world.

They do not have to borrow.

The potential trip wire in Alphabet's earnings report was Google's traffic acquisition cost (TAC).

Alphabet's (TAC) is described as money paid to other companies to direct user traffic to its suite of Google products.

(TAC) went up to $6.4 billion, which is 23% of Google's ad revenue but down on a relative percentage basis of 24%.

This was enough to keep investors from sounding the alarm and was welcomed by analysts.

Alphabet pulled out all the stops this quarter and the momentum is palpable.

Top-line growth from its core ad business shows no sign of slowing.

Acceptable (TAC) was the cherry on the sundae for the quarter at a time when many industry insiders thought it would be around 25% or higher.

Hardware offered less punch than before, which is what all high-quality tech companies desire.

There were no obvious weaknesses and the 34 straight quarters of 23% YOY growth is hard to top.

Google pulls in 10% of all global digital ad dollars in one business.

Other highlights were Waymo eclipsing the 8-million-mile mark of self-driving on public roads as it is the next business to come to the fore.

Google cloud is at an inflection point attempting to win over corporate management.

It has already won contracts with heavy hitters such as Twitter (TWTR) and Disney (DIS).

Pichai mentioned Target (TGT) as a key new cloud client that just signed on with Google last quarter.

More importantly, Alphabet's brilliant quarter bolsters the macroeconomic picture heavily reliant on tech earnings to usher the market through the gauntlet.

Regulation has proved irrelevant. Whatever fine they are slapped with does not change that Google reaps the benefits from its market position as one of the duopolies in the global ad business.

Alphabet has been trading from the bottom left to the upper right via a consistent channel.

Do not chase the new all-time high of $1,270. Use any weakness around the $1,100 level to initiate new positions.

Owning a company this dominant has little downside. The regulatory burden was a myth and Pichai has handled this operation beautifully.

I am bullish on Alphabet and its partner in crime Facebook.

________________________________________________________________________________________________

Quote of the Day

"Man is still the most extraordinary computer of all," said the 35th President of the United States John F. Kennedy.

July 23, 2018

Diary, Newsletter

Global Market Comments
July 23, 2018
Fiat Lux

Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS
GLOBAL STRATEGY DINNER),
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or IT'S SUDDENLY BECOME CRYSTAL CLEAR),
(SPY), (TLT), (QQQ),
(AMZN), (MSFT), (MU), (LRCX),
(REPORT FROM THE ORIENT EXPRESS)

The Market Outlook for the Week Ahead, or It's Suddenly Become Crystal Clear

Diary, Newsletter, Research

Maybe it's the calming influence of the sound of North Atlantic waves crashing against the hull outside my cabin door for a week. Maybe it was the absence of an Internet connection for seven days, which unplugged me from the 24/7 onslaught of confusing noise.

But suddenly, the outlook for financial markets for the rest of 2018 has suddenly become crystal clear.

I'll give you the one-liner: Nothing has changed.

Some nine years and four months into this bull market, and the sole consideration in share pricing is earnings. Everything else is a waste of time. That includes the Greece crisis, the European debt crisis that drove MF Global under, two presidential elections, the recent trade wars, even the daily disasters coming out of the White House.

Keep your eye focused on earnings and everything else will fade away into irrelevance. It that's simple.

As I predicted, the markets are stair-stepping their way northward ahead of each round of quarterly earnings reports.

And now that we know what to look at, the future looks pretty good.

The earnings story, led by big tech, is alive and well. After a torrid Q1, which saw corporate earnings grow by a heart palpitating 26%, we are looking for a robust 20% for Q2, 23% in Q3, and another 20% in Q4.

The sushi hits the fan when Q1 2019 earnings grow by a mere 5% YOY as the major elixir of tax cuts wear off, leaving us all with giant hangovers.

Amazon (AMZN), Netflix (NFLX), and Microsoft (MSFT), all Mad Hedge recommendations over the past year, account for 70% of the total market gains this year.

Look at the table below and you see there has only been ONE trade this year and that has been to buy technology stocks. Everything else, such as oil, the S&P 500 (SPY), the U.S. dollar (UUP) has been an also-ran, or an absolute disaster. And we nailed it. Some 80% of our Trade Alerts this year have been to buy technology stocks.

The gasoline poured on the fire by the huge corporate tax cuts are only now being felt by the real economy. Q2 GDP growth could run as hot as 4%. But there is a sneaking suspicion in the hedge fund industry that these represent peak earnings for the entire economic cycle.

Corporate stock buybacks hit a new all-time high in Q2, as companies repatriate cash hoards from abroad at extremely preferential tax rates to buy back their own shares.

Trade wars are certainly a worry. But retaliation is directed only at Trump supporting red states, which accounts for only a tiny share of U.S. corporate profits. Technology stocks, which account for half of all American profits, have largely been immune, except for the chip sector (MU), (LRCX), which has its own cyclical problems.

Yes, we know this will all end in tears. The yield curve will invert in a year, taking short-term interest rates higher than long-term ones, triggering a recession and a bear market. But the final year of a bull market is often the most profitable as prices go ballistic. You would be a fool to stay scared out of stocks by headline risk and an uncertain Twitter feed.

Yes, early leading indicators of a coming recession are popping up everywhere now. A stunning 12.3% drop in June Housing Starts has to be at the top of anyone's worry list, as rising home mortgage rates and disappearing tax deductions take their pound of flesh. It was the worst report in nine months.

The trade wars promise to leave the Detroit auto industry in substantially reduced form, or at least, the stock market believes so. And a 10-year U.S. treasury bond yield that has been absolutely nailed in a 2.80% to 2.90% range for three months is another classic marketing topping indicator.

I'll let you know when it is time to pull up stakes and head for higher ground. Just keep reading the Diary of a Mad Hedge Fund Trader.

As I have been at sea and out of the markets, my 2018 year-to-date performance remains unchanged at an eye-popping 24.82%, and my 8 1/2-year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.

This coming week will be a very boring week on the data front.

On Monday, July 23, there will be nothing of note to report.

On Tuesday, July 24 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.

On Wednesday, July 25 at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST the Fed is expected to raise interest rates by 25 basis points. At 2:30 Fed governor Jerome Powell holds a press conference.

Thursday, July 26, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.

On Friday, July 27 at 9:15 AM EST we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, I am going to attempt to think of more great thoughts this afternoon while hiking up to the Hornli Hut at 11,000 feet on the edge of the Matterhorn, a climb of about 5,000 feet out the front door of my chalet. I always seem to think of my best ideas while hiking uphill. The liter of Cardinal beer and a full plate of bratwurst with rosti potatoes will make it all worth it.

Good luck and good trading.