Mad Hedge Technology Letter
August 27, 2018
Fiat Lux
Featured Trade:
(WHY ALIBABA IS THE FIRST STOCK TO BUY WITH THE OUTBREAK OF TRADE PEACE),
(BABA), (GOOGL), (AMZN), (YELP), (MSFT), (MU), (ZTE), (HUAWEI)
Mad Hedge Technology Letter
August 27, 2018
Fiat Lux
Featured Trade:
(WHY ALIBABA IS THE FIRST STOCK TO BUY WITH THE OUTBREAK OF TRADE PEACE),
(BABA), (GOOGL), (AMZN), (YELP), (MSFT), (MU), (ZTE), (HUAWEI)
According to the government agency, China Internet Network Information Center, the Chinese Internet community has surpassed 802 million, which only represents a 57.7% penetration rate, miles behind the 89% penetration rate in America.
The gargantuan scale of the Chinese Internet world means China has three times as many Internet users than America, and this is a big deal.
The additional 30 million added to the Chinese Internet ecosphere in the first half of 2018 shows the scale in which local Chinese tech companies are playing with and use to their clear-cut advantage.
Ostensibly, most business strategies in China revolve around scaled tactics as the backbone to operations.
There is even more room to expand in the Middle Kingdom and one clear victor sits atop the parapet looking at the riffraff below and that is Chinese Internet conglomerate Alibaba (BABA).
Alibaba, led by Chinese Internet pioneer Jack Ma, posted its highest-performing growth quarter in the past four years.
Total quarterly revenue ballooned an incredible 61% YOY to $11.8 billion, highlighting the dominant position Alibaba possesses in the Chinese e-commerce landscape.
If you want to know what Amazon (AMZN) is going to do next watch Alibaba.
Profit margins were somewhat sacrificed in the process because of M&A activity that saw Alibaba move into the physical supermarket business snapping up 35 Hema supermarket locations then reinvesting into the business. Echoes of Whole Foods?
Alibaba did not stop there, funneling another $3 billion into food delivery app ele.me, which plans to merge its operations with Yelp (YELP) lookalike app Koubei.
If you thought Silicon Valley moves at a rapid pace, the Chinese Internet space moves faster than lighting.
Alibaba last year dipped into the retail segment as well pocketing a department store chain with 29 stores along with 17 shopping malls.
Alibaba is the closest replica the world has to Amazon and thus is an ideal barometer of the health of the overall Chinese consumer and a peek under the complicated hood that is the Chinese economy.
Alibaba also provides onlookers at how China and its Internet behemoths are coping with the global trading war that has invaded the news headlines from its outset.
The short answer to all this is that China is coping quite well and by no means is ready to back down.
Indeed, there will be peripheral pressures exerted from the fringes, but the core engines remain intact and Chairman Xi can fall asleep in his Beijing abode more than peacefully.
A reason for the stalemate between the two governments is that both are quietly confident they have the levers in place to absorb whatever Molotov cocktails the other has to throw at them.
Investors would be mad to dismiss China’s capabilities after experiencing a mesmerizing economic rise enriching hundreds of millions of Chinese nationals that can be found comfortably living in western megacities in luxury real estate often with a real estate portfolio dotted around the world.
Alibaba’s management made it known on the earnings report that it is not worried much about the trade war because it is largely focused on the domestic Chinese consumer, which has been one of the best economic stories of the past decade.
The overseas expansion unfolding under Alibaba’s tutelage is away from the western world and predominantly focused on Southeast Asia and Eastern Europe where cheap, value-for-money hardware and software allows citizens at these income levels to participate in the e-commerce game.
These individuals can’t afford iPhones on a salary of peanuts. And Alibaba has targeted the undeveloped world as a potential lever of substantial growth.
The regulatory harshness of the west has shut out Huawei and ZTE from its shores. Australia followed suit as well, banning the two telecom companies even though it enjoys a better relationship with Beijing than Europe or North America.
China has already planned a workaround because the engines driving the Chinese tech miracle are semiconductor companies such as Micron (MU), which sells boatloads of DRAM memory chips to Chinese tech companies that flood the world with smartphones and other gadgets.
Beijing has already formulated a plan to circumvent American chips by tapping Korean, European, and Japanese chips to replace the current American supply that could vanish at any time.
Shenzhen-based chip company HiSilicon fully owned by Huawei is responsible for supplying Huawei with chips and is the biggest local designer of integrated circuits in China.
This is what the future of China looks like when China can finally build up the adequate supply necessary to achieve its plans to dominate global technology, America, and the world.
But the plan is still in the process of playing out. The awkwardness was highly visible when the administration’s ban of selling U.S. manufactured components to telecommunications company ZTE resulted in the company almost shutting down until a last-second change of heart by the administration.
The near-death experience will invigorate ZTE to muster its own local supply of chips to avoid the unreliable foreign supply and a deja vu feeling.
American chip companies won’t be able to enjoy the Chinese market for long as all these negative experiences for Chinese companies has forced Chinese tech companies to search and secure a guaranteed chip supply.
At the same time, Chinese local smartphone players have gone from 0 to 60 in no time with companies that barely existed a few years ago, such as Oppo, Vivo coming into the fore along with Huawei picking up 43% of the global smartphone market.
This is bad news for Apple as local competitors are learning fast and furious how to build premium smartphones via re-engineering the current technology or through forced technology transfers.
These companies subsequently offer these phones at the lowest possible price point. And at some point in the near future Apple could be expendable if Chinese smartphones start to display the type of quality the best phones show.
Chinese domestic consumption and investment comprise 90% of the GDP growth in China and are propped up by three robust trends including real wage growth boosting the middle-class population, high savings rate that of which Americans would be jealous, and easy access to credit vehicles.
When I was recently in the Middle Kingdom, it was highly evident that as the generations became younger, their quality of life was higher than their parents.
The opposite is happening in America with millennials earning demonstrably less than their parents’ generation while the American middle class is shrinking at an accelerated pace.
Beijing knows this and hopes to wait things out as it feels time is a positive variable for China and not America.
It is true that if this trade war took place in 20 years in the future, China would be in a stronger strategic position to extract whatever concessions it desires because even though Chinese growth is slowing, it is still growing at 6.5%.
And if you don’t believe what I just said then just look at Alibaba’s cloud division, which grew 93% YOY opening artificial intelligence-based data centers around Europe to battle Amazon (AMZN) and Microsoft (MSFT).
Europe was once Elysian Fields for American tech companies, but with European regulators going after American tech and China encroaching on European turf, the future looks a lot less certain for the FANGs there than ever before.
Alibaba’s operating margins dipped 10% YOY but the slide will be returned to shareholders in the future in the form of high-quality revenue and is worth the investment into the most innovative ideas of tomorrow.
I did not even mention the large stake Alibaba has in Ant Financial, which operates the ubiquitous digital payment app Alipay.
It would be analogous to Amazon if it owned Visa.
Alibaba is one of the best tech companies in the world headed by a former Chinese English language teacher in Hangzhou.
If America becomes too difficult or expensive with which to do business, Alibaba and Chinese tech will just recalibrate their strategy to deeper infiltrate the confines of Southeast Asia and the rest of the undeveloped world.
Any price war on undeveloped soil favors the Chinese as they have mastered scale better than anyone on the planet.
The stellar Alibaba numbers also mean the trade war has no end in sight as each player thinks they have the upper hand. But it also means the tech giants from both countries will come out unscathed and will lead their country’s respective equity markets higher for the foreseeable future.
________________________________________________________________________________________________
Quote of the Day
“Technology is nothing. What's important is that you have a faith in people, that they're basically good and smart, and if you give them tools, they'll do wonderful things with them,” – said Apple cofounder and former CEO Steve Jobs.
Mad Hedge Technology Letter
August 22, 2018
Fiat Lux
Featured Trade:
(WHAT’S IN STORE FOR TECH IN THE SECOND HALF OF 2018?),
(GOOGL), (AMZN), (FB), (UTX), (UBER), (LYFT), (MSFT), (MU), (NVDA), (AAPL), (SMH)
Tech margins could be under pressure the second half of the year as headwinds from a multitude of sides could crimp profitability.
It has truly been a year to remember for the tech sector with companies enjoying all-time high probability and revenue.
The tech industries’ best of breed are surpassing and approaching the trillion-dollar valuation mark highlighting the potency of these unstoppable businesses.
Sadly, it can’t go on forever and periods of rest are needed to consolidate before shares relaunch to higher highs.
This could shift the narrative from the global trade war, which is perceived as the biggest risk to the current tech market to a domestic growth issue.
Healthy revenue beats and margin growth have been essential pillars in an era of easy money, non-existent tech regulation, and insatiable demand for everything tech.
Tech has enjoyed this nine-year bull market dominating other industries and taking over the S&P on a relative basis.
The lion’s share of growth in the overall market, by and large, has been derived from the tech sector, namely the most powerful names in Silicon Valley.
Late-stage bull markets are fraught with canaries in the coal mine offering clues for the short-term future.
Therefore, it is a good time to reassess the market risks going forward as we stampede into the tail end of the financial year.
The shortage of Silicon Valley workers is not a new phenomenon, but the dearth of talent is going from bad to worse.
Proof can be found in the controversial H-1B visa program used to hire foreign tech workers mainly to Silicon Valley.
A few examples are Alphabet (GOOGL), which was granted 1,213 H-1B approvals in 2017, a 31% YOY rise.
Alphabet’s competitor Facebook (FB) based in Menlo Park, Calif., was granted 720 H-1B approvals in 2017, a 53% YOY jump from 2016.
This lottery-based visa for highly skilled foreign workers underscores the difficulty in finding local American talent suitable for a role at one of these tech stalwarts.
Amazon (AMZN) made one of the biggest jumps in H-1B approvals with 2,515 in 2017, a 78% YOY surge.
The vote of non-confidence in hiring Americans shines an ugly light on American youth who are not applying themselves to the domestic higher education system as are foreigners.
For the lucky ones that do make it into the hallways of Silicon Valley, a great salary is waiting for them as they walk through the front door.
Reportedly, the average salary at Facebook is about $250,000 and Alphabet workers take home around $200,000 now.
Pay packages will continue to rise in Silicon Valley as tech companies vie for the same talent pool and have boatloads of capital to wield to hire them.
This is terrible for margins as wages are the costliest input to operate tech companies.
United Technologies Corp. (UTX) chief executive Gregory Hayes chimed in citing a horrid “labor shortage in the U.S. and in Europe.”
He followed that up by saying the company will have to grapple with this additional cost pressure.
Certain commodity prices are spiraling out of control and will dampen profits for some tech companies.
Uber and Lyft, ridesharing app companies, are sensitive to the price of oil, and a spike could hurt the attractiveness to recruit potential drivers.
The perpetually volatile oil market has been trending higher since January, from $47 per barrel and another spike could damage Uber’s path to its IPO next year.
Will Uber be able to lure drivers into its ecosystem if $100 per barrel becomes the new normal?
Probably not unless every potential driver rolls around in a Toyota Prius.
If oil slides because of a global recession instigated by the current administration aim to rein in trade partners, then Uber will be hard hit abroad because it boasts major operations in many foreign megacities.
A recession means less spending on Uber.
Either result will be negative for Uber and ridesharing companies won’t be the only companies to be hit.
Other victims will be tech companies incorporating transport as part of their business model, such as Amazon which will have to pass on more delivery costs to the customer or absorb the blows themselves.
Logistics is a massive expense for them transporting goods to and from fulfillment centers. And they have a freshly integrated Whole Foods business offering two-hour free delivery.
Higher transport costs will bite into the bottom line, which is always a contentious issue for Amazon shareholders.
Another red flag is the deceleration of the global smartphone market evident in the lackluster Samsung earnings reflecting a massive loss of market share to Chinese foes who will tear apart profit margins.
Even though Samsung has a stranglehold on the chip market, mobile shipments have fell off a cliff.
Damaging market share loss to Chinese smartphone makers Xiaomi and Huawei are undercutting Samsung products. Chinese companies offer better value for money and are scoring big in the emerging world where incomes are lower making Chinese phones more viable.
The same trend is happening to Samsung’s screen business and there could be no way back competing against cheaper, lower quality but good enough Chinese imitations.
Pouring gasoline on the fire is the Chinese investigation charging Micron (MU), SK Hynix, and Samsung for colluding together to prop up chip prices.
These three companies control more than 90% of the global DRAM chip market and China is its biggest customer.
The golden days are over for smartphone growth as customers are not flooding into stores to buy incremental improvements on new models.
Customers are staying away.
The smartphone market is turning into the American used car market with people holding on to their models longer and only upgrading if it makes practical sense.
Chinese smartphone makers will continue to grab global smartphone market share with their cheaper premium versions that western companies rather avoid.
Battling against Chinese companies almost always means slashing margins to the bone and highlights the importance of companies such as Apple (AAPL), which are great innovators and produce the best of the best justifying lofty pricing.
The stagnating smartphone market will hurt chip and component company revenues that have already been hit by the protectionist measures from the trade war.
They could turn into political bargaining chips and short-term pressures will slam these stocks.
This quarter’s earnings season has seen a slew of weak guidance from Facebook, Nvidia (NVDA) mixed in with great numbers from Alphabet and Amazon.
Beating these soaring estimates is not a guarantee anymore as we move into the latter part of the year.
Migrating into the highest quality names such as Amazon and Microsoft (MSFT) with bulletproof revenue drivers would be the sensible strategy if tech’s lofty valuations do not scare you off.
Tech has had its own cake and ate it too for years. But on the near horizon, overdelivering on earnings results will be an arduous chore if outside pressures do not relent.
It’s been fashionable in the past for market insiders to call the top of the tech market, but precisely calling the top is impossible.
The long-term tech story is still intact but be prepared for short-term turbulence.
________________________________________________________________________________________________
Quote of the Day
“By giving people the power to share, we're making the world more transparent,” – said cofounder and CEO of Facebook Mark Zuckerberg.
Global Market Comments
August 16, 2018
Fiat Lux
SPECIAL ARTIFICIAL INTELLIGENCE ISSUE
Featured Trade:
(NEW PLAYS IN ARTIFICIAL INTELLIGENCE),
(NVDA), (AMD), (ADI), (AMAT), (AVGO), (CRUS),
(CY), (INTC), (LRCX), (MU), (TSM)
Global Market Comments
August 10, 2018
Fiat Lux
Featured Trade:
(AUGUST 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TBT), (PIN), (ISRG), (EDIT), (MU), (LRCX), (NVDA),
(FXE), (FXA), (FXY), (BOTZ), (VALE), (TSLA), (AMZN),
(THE DEATH OF THE CAR),
(GM), (F), (TSLA), (GOOG), (AAPL)
Global Market Comments
July 27, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, AUGUST 3, 2018,
AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(STOCKS TO BUY ON THE OUTBREAK OF TRADE PEACE),
(QQQ), (SPY), (SOYB), (CORN), (WEAT), (CAT),
(DE), (BA), (QCOM), (MU), (LRCX), (CRUS),
(ORIENT EXPRESS PART II, or REPORT FROM VENICE)
Global Market Comments
July 23, 2018
Fiat Lux
Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS
GLOBAL STRATEGY DINNER),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or IT'S SUDDENLY BECOME CRYSTAL CLEAR),
(SPY), (TLT), (QQQ),
(AMZN), (MSFT), (MU), (LRCX),
(REPORT FROM THE ORIENT EXPRESS)
Global Market Comments
July 2, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE FUTURE IS HAPPENING FAST),
(HOG), (TLT), (ROM), (MU), (NVDA), (LRCX),
(SPY), (AMZN), (NFLX), (EEM), (UUP), (WBA),
(THE WORST TRADE IN HISTORY), (AAPL)
Global Market Comments
June 11, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE NEW WORLD ORDER),
(AAPL), (MU), (TWTR),
(I'M HITTING THE ROAD)
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