Posts

September 10, 2019

Global Market Comments
September 10, 2019
Fiat Lux

SPECIAL ARTIFICIAL INTELLIGENCE ISSUE

Featured Trade:
(NEW PLAYS IN ARTIFICIAL INTELLIGENCE),
(NVDA), (AMD), (ADI), (AMAT), (AVGO), (CRUS),
 (CY), (INTC), (LRCX), (MU), (TSM)

August 23, 2019

Global Market Comments
August 23, 2019
Fiat Lux

Featured Trade:

(AUGUST 21 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXB), (NVDA), (MU), (LRCX), (AMD),
 (WFC), (JPM), (BIDU), (GE), (TLT), (BA)

August 5, 2019

Mad Hedge Technology Letter
August 5, 2019
Fiat Lux

Featured Trade:

(THE CHINA TARIFF BOMBSHELL AND TECHNOLOGY),
(AAPL), (NVDA), (INTC), (MU), (WDC), (BBY)

The China Tariff Bombshell and Technology

With one little tweet, the state of technology and the companies that rely on the public markets that serve them went haywire.

U.S. President Donald Trump levied another 10% on the $300 billion that had not been tariffed up yet compounding the misery for anyone who has any vested interest in trade with mainland China.

The tariffs will take effect on September 1st.

How does this shake out for American technology?

Any brand tech name that has substantial supply chain operations can kiss their stay in the Middle Kingdom goodbye.

If management didn’t understand that before, then it’s clear as night that they need to shift their supply chain out of the reaches of the Chinese communist party.

The U.S. Administration tripling down on China being our archnemesis means that any sort of cross-border economic trade or cultural exchange will be viewed through the prism of warped geopolitics.

The U.S. President Donald Trump has in fact taken a page out of the Chinese playbook turning everything he sees and touches into a transactional tool for what he is pursuing at the time or in the future.

Specific companies facing the wrath of the tariffs are companies as conspicuous as Apple filtering down to the SMEs that make local business local.

Semiconductor chips are a huge loser in this new development as the price of electronic goods will rise with the tariffs.

If you want a name that lies in the heart of electronic consumer goods, then BestBuy (BBY) would encapsulate this thesis and unsurprisingly they were taken out to the back of the woodshed and taught a lesson dropping 10% on the news.

Any technology outfit that imports goods from China will be hit as well and this means semiconductor chips along the lines of Nvidia (NVDA), Intel (INTC), Western Digital (WDC) and Micron (MU) among others.

Chips are the meat and bones that go into end products like iPads and a slew of smart devices.

Demand will be hit because of the cost of producing these types of consumer products will rise.

The softness is showing up in the numbers with Apple’s iPhone revenue down 12% year-over-year.

Samsung of Korea also showed that this isn’t just an American problem with their semiconductor division’s operating profits down 71% year-over-year.

The Korean conglomerate is in a spat with the Japanese government over war crimes from the second world war causing the Japanese government to bottleneck the supply of chemicals needed to produce high-level semiconductor chips.

The export restriction will drag down SK Hynix display business who is one of the largest producers of DRAM chips and also a Korean company.

Consumers are also using their phones longer with Apple iPhone customers holding their device up to 4 years delaying the refresh cycle.

The company that Steve Jobs built will have to repurpose themselves for a brave new tech landscape that includes heavier regulation, trade tariffs, and device saturation.

When investors talk about the “low hanging fruit,” at this point, Apple isn’t one of them.

And if you think the services business is a cakewalk, ponder about how many apps and behemoths that spit out a whole lineup of apps.

Apple still has its ecosystem and should guard it with its life, this is the same ecosystem that can charge Google around $10 billion per year to slap on Google search as the primary search engine on Apple devices.

Expect tech to telegraph a deceleration in revenue for the last quarter and next year.

The tech environment is brittle at this point and uncertainty wafts in the air like a hot stack of pancakes.

 

 

May 21, 2019

Mad Hedge Technology Letter
May 21, 2019
Fiat Lux

Featured Trade:

(HUAWEI HITS THE FAN)
(HUAWEI), (MU), (NVDA), (GOOGL), (FB), (TWTR), (APPL)

Huawei Hits the Fan

If you ever needed a signal to stay away from chip stocks short-term, then the Huawei ban by the American administration was right on cue.

Huawei, the largest telecommunications company in China, is heavily dependent on U.S. semiconductor parts and would be seriously damaged without an ample supply of key U.S. components

The surgical U.S. ban may cause China and Huawei to push back its 5G network build until the ban is lifted while having an impact on many global component suppliers.

The Chinese communist party has exhibited a habit for retaliation and could target Apple (AAPL) who is squarely in their crosshairs after this provocative move.

At a national security level, depriving Huawei of U.S. semiconductor components now is still effective as China’s chip industry is still 5 years behind the Americans.

China has a national mandate to develop and surpass the U.S. chip industry and denying them the inner guts to build out their 5G network will have long-lasting ramifications around the world.

Starting with American chip companies, they will send chip companies such as Micron (MU) and Nvidia (NVDA) into the bargain basement where investors will be able to discount shop at generational lows because of a monumental drop in annual revenue.

Even worse for these firms, Huawei anticipated this move and stocked itself full of chips for an extra 3 months, meaning they were not going to increase shipments in a meaningful way in the short-term anyway.

This kills the chip trade for the rest of the first half of 2019, and once again backs up my thesis in avoiding hardware firms with Chinese exposure.

Alphabet (GOOGL) has cut ties with cooperating with Huawei and that means software and the apps that are built around the software too.

Gmail, YouTube, Google Maps and Chrome will be removed from future Huawei smartphones, and even though this doesn’t amount to much in mainland China, this is devastating for markets in Eastern Europe and Huawei smartphone owners in the European Union who absolutely rely on many of these Google-based apps and view Chinese smartphones as a viable alternative to high-end Apple phones.

Users who own an existing Huawei device with access to the Google Play Store will be able to download app updates from Google now, but these same users will not consider Huawei phones in the future when the Google Play Store is banned forcing them to go somewhere else for the new upgrade cycle.

The fallout further bifurcates the China and American tech ecosystems.

I would argue that China had already banned Google, Facebook (FB), Twitter (TWTR), and marginalized Amazon (AMZN) before the trade war even started.

The American government is merely putting in place the same measures the Chinese communist party has had in place for years against foreign competition.

The recent ban on Huawei was a proactive response to China backing away from negotiations that they already had verbally agreed upon after hawks inside the Chinese communist party gained the upper hand in the tireless fight against the reformist.

These hawks want to preserve the status quo because they benefit directly from the current system and economic structure in place.

The American administration appears to have taken on an even more aggressive tone with the Chinese, as the resulting tariffs are putting even more stress on the Chinese hawks.

However, there is only so much bending they can do until a full-scale fissure occurs and debt rated “A” which is its third-highest classification has recently been slashed to a negative outlook as the tariff headwinds pile up.

The U.S. administration could further delve into its party bag by rebanning Chinese tech firm ZTE who almost folded after the first ban of U.S. semiconductor components.

The U.S. administration is emboldened to play the hand they have now because as long as Chinese tech need U.S. chips, the ball is in the American’s court and going on the offensive now would be more effective than if they carried out the same strategy in the future.

China is clearly attempting to delay the process enough to get to the point where they can install their own in-house chips and can say adios to America and the chips they currently rely on.

It’s doubtful at the current pace of escalation if China can survive until that point in time.

How will China react?

Massive easing and dovishness by the Chinese central bank will be needed to maintain stability and remedy the economy.

The manufacturing sector will face another wave of mass layoffs and debt pressures will inch up.

Chinese exports will get slashed with international corporations looking to move elsewhere to stop the hemorrhaging and rid itself of uncertainty.

Many Chinese tech companies will have entire divisions disrupted and even shut down because of the lack of hardware needed to operate their businesses.

Imagine attempting to construct a smartphone without chips, almost like building a plane to fly without wings.

This is also an easy to decode message to corporate America letting them know that if they haven’t moved their supply chains out of China yet, then time is almost up.

Going forward, I do not envision any meaningful foreign tech supply chain that could survive operating in mainland China because nationalistic forces will aim for revenge sooner or later.

There are many positives to this story as the provocative decision has been carried out during a time when the American economy is fiercely strong and firing on all cylinders.

Unemployment is spectacularly low at 3.6%, the lowest rate since 1969, while wage growth has accelerated to 3.8% annually up from 3.4%.

The robust nature of the economy has led to stock market performance being incredibly resilient in the face of continuous global headline risk.

The positive reactions are in part based on the notion that investors expect the Fed Governor Jerome Powell to adopt an even more dovish stance towards rates.

It’s almost as if we are back to the bad news is good news narrative.

Each dip is met with a furious bout of buying and even though we are trudging along sideways, for the time being, this sets up a great second half of the year as China will be forced to fold or face mass employment or worse offering at least a short-term respite for investors to go risk on.

As for the chip sector, high inventories on semiconductor balance sheets and in the channel will continue, as well as weak end demand in nearly every semiconductor end market meaning a once-in-a-generation magnitude of memory oversupply.

The trade war will most likely turn for the worse giving investors even more beaten down prices that will turn into great entry points when the time is ripe.

 

 

 

May 14, 2019

Mad Hedge Technology Letter
May 14, 2019
Fiat Lux

Featured Trade:

(CHINA’S COUNTERATTACK)
(AAPL), (MSFT), (ADBE), (PYPL), (QCOM), (MU), (JD), (BABA), (BIDU)

China’s Counterattack

Ratcheting up the trade tensions, China is pulling the trigger on retaliatory tariffs on $60 billion worth of U.S. goods, just days after the American administration said it would levy higher tariffs on $200 billion in Chinese goods.

American President Donald Trump accused China of reneging on a “great deal.”

The mushrooming friction between the two superpowers gives even more credence to my premise that hardware stocks should be avoided like the plague.

I have stood out on my perch in 2019 and proclaimed to buy software stocks and if you need one name to hide out in then I would confidently choose Microsoft (MSFT).

Microsoft has little exposure to China and will be rewarded the most on a relative basis.

The last place you want to get caught out is buying hardware stocks exposed to China and Apple is quickly turning into the largest piece of collateral damage along with airplane manufacturer Boeing.

Remember that 20% of Apple’s revenue comes from China and Apple bet big to solidify a complex supply chain through Foxconn Technology Group in China.

When history is recorded, CEO of Apple Tim Cook not hedging his bets exposing Apple’s revenue machine could go down as one of the worst ever managerial decisions by tech management.

The forced intellectual property transfers in China from western corporations was the worst kept secret in corporate America.

Being an operational guru as he is, and the hordes of data that Apple have access to, this was a no brainer and Cook should have mitigated his risks by investing in a supply chain that was partially outside of China, and not incrementally spreading out the supply chain through other parts of Asia is coming back to bite him.

China’s most recent tariffs will come into effect on June 1, adding up to 25% to the cost of U.S. goods that are covered by the new policy from China’s State Council Customs Tariff Commission.

The result of these newly minted tariffs is that importers will probably elect to avoid absorbing the costs themselves and pass the price hikes to the consumer sapping demand.

The American consumer still retains its place as the holy grail of the American economic bull case, but this will test the thesis.

For the short term, it would be foolish to hang out to Chinese companies listed in New York through American depository receipts (ADR) such as JD.com (JD), Alibaba (BABA).

Baidu (BIDU) is a company that I am flat out bearish on because of a weakening strategic position versus Alibaba and Tencent in China.

Even with no trade war, I would tell investors to short Baidu, and the chart is nothing short of disgusting.

Wei Jianguo, a former vice-minister at the Chinese Ministry of Commerce who handled foreign trade, said to the South China Morning Post that “China will not only act as a kung fu master in response to U.S. tricks but also as an experienced boxer and can deliver a deadly punch at the end.”

It is clear that any goodwill between the two heavyweight powers has evaporated and the hardliners inside the communist party pulled all the levers possible to back out at the last second.

Many of us do not understand, but there is a complicated political game perpetuating inside the Chinese communist party pitting reformists against staunch traditionalists.

This is not only Chairman Xi’s decision and appearing weak on the global stage is the last concession the communist government will subscribe to.

Along with the iPhone company, semiconductor stocks will be ones to avoid.

The list starts out with the chip companies leveraged the most to Chinese revenue as a proportion of total sales including Qualcomm (QCOM) with 65% of revenue in China, Micron (MU) who has 57% of sales in China, Qorvo who has half of sales from China, Broadcom who has 48% of sales from China, and Texas Instruments rounding out the list with 43% of total revenue from China.

The first 5 months of the year saw constant chatter that the two sides would kiss and makeup and chip stocks benefitted from that tsunami of positive momentum.

The picture isn’t as pretty when you flip the script, and chip stocks could suffer a gut-wrenching summer if the two sides drift further apart.

After Microsoft, other software names I would take comfort in with the added bonus of strong balance sheets are Veeva Systems (VEEV), PayPal (PYPL), and Adobe (ADBE).

The new tariffs will burden American households to up to $2 billion per month going forward, and new purchases for discretionary items like extra electronics will be put on the back burner extending the refresh cycle and saddling chip companies and Apple with a glut of iPhone and chip inventory.

Buy software companies on the dip.

 

 

February 22, 2019

Global Market Comments
February 22, 2019
Fiat Lux

Featured Trade:

(FEBRUARY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (MU), (AMD), (LRCX), (GLD), (FXE), (FXB), (AMZN),
(PLAY IT SAFE WITH ANTHEM), (ANTM), (CI)

February 20 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: If there is a China trade deal, should I buy China stocks, specifically Alibaba?

A: To a large extent, both Chinese and US stocks have already fully discounted a China trade deal, so buying up here could be very risky. The administration has been letting out a leak a day to support the stock market, so I don’t think there will be much juice left when the announcement is actually made. The current high levels of US stocks make everything risky.

Q: Is it time to buy NVIDIA (NVDA)?

A: The word I’m hearing from the industry is that you don’t want to buy the semiconductor stocks until the summer when they start discounting the recovery after the next recession (which is probably a year off from this coming summer). The same is true for Micron Technology (MU), Advanced Micro Devices (AMD), and Lam Research (LRCX).

However, if you’re willing to take some heat in order to own a stock that’s going to triple over the next three years, then you should buy it now. If you’re a long-term investor, these are the entry points you die for. Looking at the charts it looks like it is ready to take off.

Q: Should I be shorting the euro (FXE), with the German economy going into recession?

A: No. We’re at a low for the euro so it’s a bad time to start a short. It’s interest rates that drive the euro more than economies. With the U.S. not raising interest rates for six months, maybe a year, and maybe forever, you probably want to be buying the currencies more than selling them down here.

Q: Would you buy the British pound (FXB) on Brexit fears?

A: I would; my theory all along has been that Brexit will fail and the pound will return to pre-Brexit levels—30% higher than where we are at now. I have always thought that the current government doesn’t believe in Brexit one iota and are therefore executing it as incompetently as possible.

They have done a wonderful job, missing one deadline after the next. In the end, Britain will hold another election and vote to stay in Europe. This will be hugely positive for Europe and would end the recession there.

Q: What do we need to do for the market to retest the highs?

A: China trade deal would do it in a heartbeat. If this happens, we will get the 5% move to the upside initially. Then we’re looking at a double top risk for the entire 10-year bull market. That’s when the short players will start to come in big time. You’d be insane to new positions in stocks here. There is an easy 4,500 Dow points to the downside, and maybe more.

Q: Do you think earnings growth will come in at 5%, or are they looking to be zero or negative?

A: Zero is looking pretty good. We know companies like to guide conservative then surprise to the upside; however, with Europe and China slowing down dramatically, that could very well drag the U.S. into recession and our earnings growth into negative numbers. The capital investment figures have been falling for three months now. US Durable Goods fell by 1.2% in January.

This explains why companies have no faith in the American economy for the rest of this year. This was a big reason why Amazon (AMZN) abandoned their New York headquarters plans. They see the economic data before we do and don’t want to expand going into a recession.

Q: When will rising government debt start to hurt the economy?

A: It already is. Foreign investors have been pulling their bids for fear of a falling US dollar. They have also become big buyers of gold (GLD) in order to avoid anything American, so we have a new bull market there. In the end, the biggest hit is with business confidence.

Nothing good ever comes from exploding US deficits and companies are not inclined to invest going into that. That is a major factor behind the sudden deterioration in virtually all data points over the past month.

Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader