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The Market Outlook for the Week Ahead, or There’s No Santa Claus in China

On Friday, five serious hedge fund managers separately called me out of the blue and all had the same thing to say. They had never seen the market so negative before in the wake of the worst quarter in seven years. Therefore, it had to be a “BUY”.

I, on the other hand, am a little more cautious. I have four 10% positions left that expire on Friday, in four trading days, and on that day I am going 100% into cash. At that point, I will be up 3.5% for the month of December, up 31.34% on the year, and will have generated positive return for one of the worst quarters in market history.

I’m therefore going to call it a win and head for the High Sierras for a well-earned Christmas vacation. After that, I am going to wait for the market to tell me what to do. If it collapses, I’ll buy it. If it rockets, I’ll sell short. And I’ll tell you why.

These are not the trading conditions you would expect when the economy is humming along at a 2.8% annual rate, unemployment is running at a half-century low, and earnings are growing a 26% year on year. You can’t find a parking spot in a shopping mall anywhere.

However, the lead stocks like Apple (AAPL), Amazon (AMZN), and Netflix (NFLX) have plunged by 30%-60%. Price earnings multiples dropped by a stunning 27.5% from 20X to 14.5X in a mere ten weeks. Half of the S&P 500 (SPY) is in a bear market, although the index itself isn’t there yet. I would rather be buying markets on their way up than to try and catch a falling knife.

There is only one catalyst for that apparent yawning contradiction: The President of the United States.

Trump has created a global trade war solely on his own authority. Only he can end it. As a result, asset classes of every description are beset with uncertainty, confusion, and doubt about the future. Analysts are shaving 2019 growth forecasts as fast as they can, businesses are postponing capital spending plans, and investors are running for the sidelines in droves. Business confidence is falling like a rock

To paraphrase a saying they used to teach you in Marine Corps flight school, “It’s better to be in cash wishing you were fully invested than to be fully invested wishing you were in cash.”

The Chinese have absolutely no interest in caving into Trump’s wishes. They read the New York Times, see the midterm election result and the opinion polls, and are willing to bet that they can get a much better deal from a future president in two years.

I have been dealing personally with both Trump and the Chinese government for four decades. The Middle Kingdom measures history in Millenia. The president lives from tweet to tweet. The Chinese government can take pain by simply ordering its people to take it. We have elections every two years with immediate consequences.

The best we can hope for is that the president folds, declares victory, and then retreats from his personal war. This can happen at any time, or it may not happen at all. No one has an advantage in predicting what will happen with any certainty. Not even the president knows what he is going to do from minute to minute.

It is the possibility of trade peace at any time that has kept me out of the short side of the stock market in this severe downturn. That robs a real hedge fund manager of half his potential income. Trade peace could be worth an instant rally of 10% in the stock market. Even a lesser move, like the firing of trade advisor Peter Navarro, would accomplish the same.

The market was long overdue for a correction like the one we have just had. Investors were getting overconfident, cocky, and excessively leveraged. In October, we really needed the tide to go out to see who was swimming without a swimsuit. But if the tide goes out too far, we will all appear naked.

Thanks to some very artful trading, my year to date return recovered to +27.54% boosting my trailing one-year return back up to 27.54%. I covered an aggressive short position in the bond market (TLT) for a welcome 14.4% profit. I also took profits with an instant winner in PayPal (PYPL). On the debit side, I stopped out of an Apple call spread for a minimal loss.

December is showing a very modest loss at -0.26%. The market has become virtually untradeable now, with tweets and China rumors roiling markets for 500 points at a pop. And this is against a Dow Average that is down a miserable -2.8% so far in 2018. I should have listened to my mother when she wanted me to become a doctor.

My nine-year return nudged up to +304.01. The average annualized return revived to +33.77.

The upcoming week is all about housing data, with the big focus on the Fed’s interest rate hike on Wednesday.

Monday, December 17 at 10:00 AM EST, the November Homebuilders Index is out.

On Tuesday, December 18 at 8:30 AM, November Housing Starts are published.

On Wednesday, December 19 at 10:00 AM EST, November Existing Home Sales are released.

At 10:30 AM EST the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.

At 2:00 PM the Federal Reserve Open Market Committee announces a 25 basis point rise in interest rates, taking the overnight rate to 2.25% to 2.50%. An important press conference with governor Jay Powell follows.

Thursday, December 20 at 8:30 AM EST, we get Weekly Jobless Claims.

On Friday, December 21, at 8:30 AM EST, we learn the latest revision to Q3 GDP which now stands at 2.8%.

The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I’ll be battling snow storms driving up to Lake Tahoe where I’ll be camping out for the next two weeks. Mistletoe, eggnog, and endless games of Monopoly and Scrabble await me.

Good luck and good trading!

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

December 13, 2018

Diary, Newsletter, Summary

Global Market Comments
December 13, 2018
Fiat Lux

Featured Trade:

(WHAT’S THE MATTER WITH APPLE?),
(AAPL), (MSFT), (KO), (AMZN), (CLX), (NFLX),
(WHY YOUR OTHER INVESTMENT NEWSLETTER IS SO DANGEROUS)

What’s the Matter With Apple?

Diary, Newsletter, Research

It was 38 years ago today that Apple (AAPL) went public and has generated a 43,000% return since its $22 IPO price. If you bought one share of Apple way back then for $22 it would be worth a breathtaking $95,000 today.

I waited until the next crash and then bought it at $4, and it sits in one of my “no touch” ultra-long-term retirement portfolios today.

Suddenly, the torture I endured taking Steve Jobs around to visit the New York institutional investors during the early 1980s was worth it.

The great rule of thumb I have learned after 50 years of investment is that if you hold a stock long enough, the dividend will exceed your original capital cost, giving you a 100% a year annual cash flow.

Three months ago, Apple was the Teflon stock of the entire market, the company that could do no wrong, the only “safe” stock that traded. Any selling met a wave of buying from Oracle of Omaha Warren Buffet and Apple itself, limiting corrections to a feeble 4%.

What a difference three months make!

Now the shares have become a market pariah, targeted by algorithms and hedge funds alike, and beaten like the proverbial red-headed stepchild. As a result, the shares have plunged an eye-popping 29.61%, vaporizing $311 billion in market capitalization.

Which begs one to ask the question, “What’s the matter with Apple?” How can things go from so right to so wrong?

Just like success has many fathers, failure is an orphan.

The harsh truth is that Apple became too much of a good thing to too many people. Expectations had become excessive and it had become too widely owned by traders with weak hands. In other words, people like me.

I had been cautious of Apple for a while because if its massive China exposure. You don’t want to own a company that relies entirely on Middle Kingdom production during a running trade war. Apple sold an incredible 216 million iPhones in 2017, and all of them are made at the Foxconn factories in southern China.

Apple has become the whipping boy for both sides in the trade conflict. The company has always run the risk of its Foxconn workers arriving at work late someday, or not showing up at all at the prodding of Beijing. Recently, Trump said iPhones imported from China could be subject to the current 10%, soon to be 25% tariff.

The final nail in the coffin came on Monday morning when we learned of a lower Chinese court’s ruling against Apple in a lawsuit from QUALCOMM (QCOM). Never mind that the suit was years old and applied only to the company’s older phones. With the shares in free fall, that is just what investors DIDN’T want to hear.

However, Apple is not dead, it is just resting. Or, call it ripening.

Not only could Apple recover strongly from these abysmal levels, IT COULD DOUBLE IN VALUE.

The core of my argument (no pun intended) is that Apple is in the process of fundamentally evolving its business model. It is rapidly morphing from a one-time sale only hardware company to a recurring subscription services company. And that is where the big money is in the future.

Microsoft (MSFT) is already doing it, so are Amazon (AMZN) and Netflix (NFLX). In fact, everyone is doing it, even the Diary of a Mad Hedge Fund Trader.

In fact, Apple's services revenue could balloon to $100 billion in five years, compared to its estimated total sales this year of $265 billion.

This accomplishes several important things. It moves the company out of a 30% gross margin business to a 70% gross margin. It converts Apple from a highly cyclical to stable earnings growth. Stable earnings growth companies are awarded much higher share price multiples.

Look no further than my next-door neighbor, Clorox (CLX), which trades at a much loftier 23X multiple and Coca-Cola (KO) which can be found at generous 19X multiple. Earnings visibility is worth its weight in gold. This could make Apple’s current 14X multiple a thing of the past.

Of course, we are not going to see a straight line move from one dominant business to another, and the road along the road could be bumpy. We could easily see one more meltdown which takes us to the subterranean $160 handle.

But $10 of downside risk versus $170 of upside? I’ll take that all day long. I bet you will too!

Time for a Nibble?

November 26, 2018

Diary, Newsletter, Summary

Global Market Comments
November 26, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or ARE WE IN OR OUT?)
(FB), (AAPL), (AMZN), (NFLX),
(GOOG), (SPY), (TLT), (USO), (UNG), (ROM)

The Market Outlook for the Week Ahead, or Are We In or Out?

Diary, Newsletter

Are we already in a recession or still safely out of one?

That is the question painfully vexing investors after the stock market action of the past seven weeks.

There is no doubt that the economic data has suddenly started to worsen, setting off recession alarms everywhere.

October Durable Goods were down a shocking 4.4%. Weekly Jobless Claims hit 224,000, continuing a grind up to a 4 ½ month high. Is the employment miracle ending? Goldman Sachs says growth is to drop below 2% in 2019, well below Obama era levels. Maybe that’s what the stock market crash is trying to tell us?

The Washington political situation continues to erode confidence by the day. We have already lost real estate, autos, energy, semiconductors, retailers, utilities, and banks. But as long as tech held up, everything was alright.

Now it’s not alright.

The tech selloff we have just seen was far steeper and faster than we saw in the 2008-2009 crash. You have to go all the way back to the Dotcom Bust 18 years ago to see the kind of price action we have just witnessed. The closely watched ProShares Ultra Technology Fund (ROM) has cratered from $123 to $83 in a heartbeat, off 32.5%.

Which begs the question: Are we already ten months into a bear market? Or is this all one big fake-out and there is one more leg up to go before the fat lady sings?

I vote for the latter.

If this is a new bear market, then it is the first one in history with the lead sectors, technology, biotechnology, and health care, announcing new all-time profits going in.

So, either Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOG) are all about to announce big losses in coming quarters, which they aren’t, or the market is just plain wrong, which it is.

Which leads us to the next problem.

Markets can be wrong for quite a while which is why I cut my positions by half at the beginning of last week. To quote my old friend, John Maynard Keynes, “Markets can remain irrational longer than you can remain liquid,” who lists his entire fortune in the commodities markets during the Great Depression.

To see this all happen in October was expected. After all, markets always crash in October. To see it continue well into November is nearly unprecedented when the strongest seasonals of the year kick in. This was the worst Thanksgiving week since 2011 when we were still a wet dog shaking off the after-effects of the great crash.

There are a lot of hopes hanging on the November 29 G-20 Summit to turn things around which could hatch a surprise China trade deal when the leaders of the two great countries meet. The Chinese stock market hit a one month high last week on hopes of a positive outcome. Do they know something we don’t?

There were multiple crises in the energy world. You always find out who’s been swimming without a swimsuit when the tide goes out. James Cordier certainly suffered an ebb tide of tsunami proportions when his hedge fund blew up taking natural gas (UNG) down 20% in a day.

Cordier got away with naked call option selling for years until he didn’t. All of his investors were completely wiped out. I have always told followers to avoid this strategy for years. It’s picking up pennies in front of a steamroller. Same for naked puts selling too.

The Bitcoin crash continued slipping to $4,200. I always thought that this was an asset class created out of thin air to absorb excess global liquidity. Remove that liquidity and Bitcoin goes back to being thin air, which it is in the process of doing.

Oil (USO) got crushed again, down an incredible 35.06% in six weeks, from $77 a barrel all the way down to $50 as recession fears run rampant. Panic dumping of wrong-footed hedge fund longs accelerated the slide. They all had expected oil to rocket to $100 a barrel in the wake of the demise of the Iran Nuclear Deal and the economic sanctions that followed.

Apparently, Saudi Arabia’s deal with the US now is that they can chop up all the journalists they want at the expense of a $27 a barrel drop in the price of oil. That will cut their oil revenues by a stunning $97 billion a year. That’s one expensive journalist!

Watch the price of Texas tea carefully because a bottom there might signal a bottom for everything including tech stocks. And I don’t see oil falling much from here.

As for performance, Thanksgiving came early this year, at least in terms of the skinning, gutting, and roasting of my numbers. If you do this long enough, it happens. Every now and then, markets instill you with a strong dose of humility and this is one of those time.

My year to date return dropped to +25.72%, and chopping my trailing one-year return stands at 31.71%. November so far stands at a discouraging -3.91%. And this is against a Dow Average that is down -2.01% so far in 2018.

My nine-year return withered to +302.19%. The average annualized return retraced to +33.57%.

The upcoming week has some important real estate data coming. However, all eyes will be upon the Friday G-20 announcement from Buenos Aires. Will the trade war with China end, or get worse before it gets better?

Monday, November 26 at 8:30 EST, the Chicago Fed National Activity Index is published.

On Tuesday, November 27 at 9:00 AM, the all-important CoreLogic Case-Shiller National Home Price Index is out. It will be interesting to see how fast it is falling.

On Wednesday, November 28 at 8:30 AM, Q3 GDP is updated. How fast is it shrinking?

At 10:30 AM the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.

Thursday, November 29 at 8:30 we get Weekly Jobless Claims which have been on a four-month uptrend. At 10:00 AM, October Pending Home Sales are printed.

On Friday, November 30, at 9:45 AM, the week ends with a whimper with the Chicago Purchasing Managers Index.

The Baker-Hughes Rig Count follows at 1:00 PM. At some point, we will get an announcement from the G-20 Summit of advanced industrial nations.

As for me, I drove through the first blizzard of the year over Donner Pass to finally crystal clear skies of San Francisco. Long-awaited drenching rains had finally cleansed the skies. Every Tahoe hotel was packed with Californians fleeing the smokey skies.

Good luck and good trading.

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

November 23, 2018

Diary, Newsletter, Summary

Global Market Comments
November 23, 2018
Fiat Lux

Featured Trade:

(SURVIVING THANKSGIVING)
(SPY), (TLT), (TBT), (GLD), (FXE), (FXY), (USO), (VIX), (VXX), (NVDA), (NFLX), (AMZN)

Surviving Thanksgiving

Diary, Newsletter

The Mad Hedge Fund Trader took a much-needed break this week to enjoy turkey with his vast extended family on the pristine shores of Incline Village, Nevada.

The weather was crystal clear, the temperature in the sixties throughout the day, and down into the teens at night. The kids took turns freezing bottles of water outside. To a fire-weary Californian, that’s cool.

During my nighttime snowshoeing on the Tahoe Rim Trail, I am overawed by a pale waning moon setting into the lake. I walked through a heard of elk in the darkness, the snow crunching under my boots. On the way back, I noticed that a mountain lion had been tracking me.

The Trade Alerts went out so fast and furious this year, bringing in my biggest outperformance of my competitors since my service started 11 years ago. As of today, we are up 26% on the year versus a Dow Average (INDU) that has gained exactly zero.

Great managers are not measured by how much they make in rising markets but by how little they lose in falling ones.

I made money during the two market meltdowns this year, at least until this week. That last 1,000-point dive really hurt and breaks all precedent with Thanksgiving weeks past.

I played tech hard from the long side during the first half, then avoided it like the plague in the third quarter.

Short positions in bonds (TLT) continued to be my “rich uncle” trade every month this year. I am currently running a double position there.

I avoided banks, energy, gold, and commodities which performed horribly despite many entreaties to get in.

I avoided the foreign exchange markets such as the Japanese yen (FXY) and the Euro (FXE) because they were largely moribund and there were better fish to dry elsewhere.

The Volatility Index (VIX), (VXX) was a push on the year with both longs and shorts.

My big miss of the year was in biotechnology and health care. I am well familiar with the great long-term bull case for these sectors. But I was afraid that the president would announce mandatory drug price controls the day after I took a position.

I still believe in the year-end rally, although we will be starting from much lower levels than I thought possible. The recent technology crash was really something to behold, with some of the best quality companies like NVIDIA (NVDA), Amazon (AMZN), and Netflix (NFLX) down 30%-60% in weeks. It all looked like a Dotcom Bust Part II.

These are all screaming buys for the long term here. Tech companies are now trading cheaper than toilet paper making ones.

As Wilber Wright, whose biography I am now reading, once said, “Eagles can’t soar to greatness in calm skies.” His picture now adorns every American commercial pilot’s license, including mine.

This is a week when my mother’s seven children, 22 grandchildren, and 11 great-grandchildren suddenly remember that they have a wealthy uncle, cousin, or brother with a mansion at Lake Tahoe.

So, the house is packed, all the sofa beds put to use. We even had to put a toddler to sleep in a bathtub on pillows.

A 28-pound bird made the ultimate sacrifice and was accompanied with mashed potatoes, gravy, stuffing, potato salad, and mince pie. Cooking a turkey here at 6,125 feet can be tricky where water boils only at 198 degrees Fahrenheit. You have to add 15% to the cooking time or you end up with medium-rare meat, not such a great idea with a turkey.

Topping it all was a fine Duckhorn Chardonnay which the White House served at state dinners during a former administration. I’m told the current president doesn’t drink.

I ate an entire pumpkin pie topped with whipped cream last night just to give my digestive system an early warning that some heavy lifting was on its way.

I am the oldest of seven of the most fractious and divided siblings on the planet, so attending these affairs is always a bit of an emotional and physical challenge.

I bet many of my readers are faced with the same dilemma, with mixed red state/blue state families, and they all have my sympathy. Hint: Don’t mention Bitcoin. Your Millennial guests will suddenly develop food poisoning, down 80% in a year.

My family ranges throughout the entire political spectrum, from far-right big oil to far-left pot legalization and transgender rights. For this first time in family history, we all voted for the same candidate in the last election in every one of three generations.

Hillary Clinton. Go figure!

Suffice it to say that we'll be talking a lot about the only two safe subjects there are, sports and the weather. Go Niners! Hurray Giants! Will it snow?

We are all giving thanks that we weren’t roasted alive in a wildfire and prayed for the 1,000 missing who won’t be sitting down for Thanksgiving dinners this year. Most will never be found.

I learned from my brother who runs a trading desk at Goldman Sachs that the industry expects a recession in 2019. (GS) stock has been hammered because the had to refund $600 million in fees that were stolen from the Malaysian government.

Dodd-Frank and Glass Steagall are history, and interest rates are steadily rising like clockwork. Trading volumes are shrinking as the algorithms take over everything. Some 80% of all trading is now thought to be machine-driven.

He finally traded in his Bentley Turbo R for a new black high-performance Tesla Model X with the “ludicrous” mode. I take delivery of mine at the Fremont, CA factory next week. After six decades, sibling rivalry still lives. I cautioned him to keep an ample supply of airline airsick bags in the car. Good thing he got it before the subsidies expired at yearend!

It looks like it’s OK to be rich again.

My born-again Christian sister was appalled at the way the government separated children from parents at the border earlier this year. There are still several hundred lost.

My gay rights activist sister has been marching to protest current government policy on the issue. She was quick to point out that Colorado elected its first gay governor, although I doubt anyone there will notice since they are all stoned in the aftermath of marijuana legalization.

A third sister married to a very pleasant fellow in Big Oil (USO) will be making the long trip from Borneo where he is involved in offshore exploration. This is the guy who escaped from Libya a few years ago by the skin of his teeth.

In the meantime, his industry has been beset by waves of cost-cutting and forced early retirements triggered by the recent oil price crash. He says the US will have to build energy infrastructure for a decade before it can export what it is producing now in oil and natural gas.

So far, the local headhunters haven’t taken a trophy yet. And I mean real headhunters, not the recruiting kind.

Sister no. 4, who made a killing in commodities in Australia and then got out at the top seven years, thanks to a certain newsletter she reads, graced us with a rare visit.

Fortunately, she took my advice and converted all her winnings to greenbacks, thus avoiding the 30% hit the Aussie (FXA) has taken in recent years.

She’s now investing in cash flow positive Reno condos, again, thanks to the same newsletter.

My poor youngest sister, no. 5, took it on the nose in the subprime derivatives market during the 2008 crash. Fortunately, she followed my counsel to hang on to the securities instead of dumping everything at the bottom for pennies.

She is the only member of the family I was not able to convince to sell her house in 2005 to duck the coming real estate collapse because she thought the nirvana would last forever. At least that is what her broker told her.

Thanks to the seven-year-old real estate boom, she is now well above her cost, while serial refi’s have taken her cost of carry down by more than half.

My Arabic speaking nephew in Army Intelligence cashed out of the service and is now attending college on the newly revamped GI Bill.

He is majoring in math and computer science on my recommendation. My dad immensely benefited from the program after WWII, a poor, battle-scarred kid from Brooklyn attending USC. For the first time in 45 years, not a single family member is fighting in a foreign war. No gold stars here, only blue ones. If it can only last!

My oldest son is now in his 10^th year as an English language professor at a government university in China. He spends his free time polishing up his Japanese, Russian, Korean, and Kazak, whatever that is.

At night, he trades the markets for his own account. Where do these kids get their interest in foreign languages anyway? Beats me. I was happy with seven.

He is planning on coming home soon. Things have recently gotten very uncomfortable for American residents of the Middle Kingdom.

It’s true that the apple doesn’t fall far from the tree.

My second son is now the head of SEO (search engine optimization) at a major Bay Area online company. Hint: you use their services every day. His tales of excess remind me of the most feverish days of the Dotcom boom. He says that technology is moving forward so fast that he can barely keep up.

His big score this year was winning a lottery to get a rent-controlled apartment in a prime San Francisco neighborhood. It’s all of 400 square feet but has a great view and allows dogs, a rarity indeed.

My oldest daughter took time out from her PhD program at the University of California to bear me my first grandchild, a boy. It seems all my kids are late bloomers. We are all looking forward to the first Dr. Thomas someday (we have an oversupply of Captains).

I am looking forward to my annual Scrabble tournament with all, paging my way through old family photo albums between turns. And yes, “Jo” is a word (a 19^th century term for a young girl). So is “Qi.” The pinball machine is still broken from last Thanksgiving, or maybe it just has too many quarters stuffed in it.

Before dinner, we engaged in an old family tradition of chopping down some Christmas trees in the nearby Toiyabe National Forest on the Eastern shore of Lake Tahoe.

To keep it all legal I obtained the proper permits from the US Forest Service at $10 a pop.

There are only three more trading weeks left this year before we shut down for the Christmas holidays.

That is if I survive my relatives.

Good luck and good trading!
Captain John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

A Lesson in Blitzscaling

Tech Letter

One of the fastest parts of technology growing at a rapid clip is fintech.

Fintech has taken the world by storm threatening the traditional banks.

Companies such as Square (SQ) and PayPal (PYPL) are great bets to outlast these dinosaurs who have a laser-like focus on technology to move the digital dollars in an efficient and low-cost way.

Another section of the technology movement that has caught my eye morphing by the day is the online food delivery segment that has soaring operating margins aiding Uber on their quest to go public next year.

There have been whispers that Uber could garner a $120 billion valuation dwarfing Chinese tech giant Alibaba’s (BABA) IPO which was the biggest IPO to date at $25 billion.

Uber is following in Amazon’s footsteps executing the “blitzscaling” method to suppress competition.

This strategy involves scaling up as quick as possible and seizing market share before anyone can figure out what happened.

The growth explodes at such speed that investors pile in droves throwing inefficient capital at the business leading the company to make bold bets even though profit is nowhere to be seen.

Blitzscaling has fueled American and Chinese tech to the top of the global tech charts and the trade war is mainly about these two titans jousting for first and second place in a real-time blitzscale battle of epic proportion.

The audacious stabs at new businesses usually end up fizzling out, but the ones that do have the potential to blaze a trail to profitability.

One business that has Uber giving hope of one day returning capital to shareholders is Uber Eats – the online food delivery service.

Total sales of restaurant deliveries will hit 11% of revenue if the current trend continues in 2022 marking a giant shift in consumer attitudes.

No longer are people eating out at restaurants, according to data, younger generations view ordering from an online food delivery platform as a direct substitute.

This mindset is eerily similar to Millennials attitude towards entertainment.

For many, Netflix (NFLX) is considered a better option than attending a movie theatre, and all forms of outdoor entertainment are under direct attack from these online substitutes.

One firm on the forefront of this movement has been Domino’s Pizza (DPZ).

You’d be surprised to find out that over half of the Domino’s Pizza staff are software developers.

They have focused on the customer experience doubling down on their online platform to offer the easiest way to order a pizza.

In 2012, the company was frightened to death that it still took a 25-step process to order a pizza.

By 2016, Domino’s rolled out “zero-click ordering” offering 15 different ways to order their product across many major platforms including Amazon’s Alexa.

This has all led to 60% of sales coming from online and rising.

The consistency, efficiency, and seamless online payment process has all helped Dominoes stock rise over 800% since May 2012 and that is even with this recent brutal sell-off.

Uber is perfectly positioned to take advantage of this new generation of dining in.

In the third quarter, Uber booked $2.1 billion of gross booking volume in their powerful online food delivery service.

The 150% YOY rise makes Uber Eats a force to be reckoned with.

Uber’s investment into e-scooters and bike transportation stems from the potential synergies of online food delivery efficiency.

It’s cheaper to deliver pizzas on a bicycle or anything without an internal combustion engine.

If you ever go to China, the electric powered three-wheel modified tuk-tuk with a storage compartment in the back instead of passenger seating is pervasive.

Often navigating around narrow alleyways is inefficient for a four-wheel automobile, and as Uber sets its sights on being the go-to last mile deliverer of food and whatnot, building out this vibrant transport network is vital to its long-term vision.

In fact, Uber is not an online ride-sharing platform, it will be something grander and its Uber elevate division could showcase Uber’s adaptability by making air transport cheap for the masses.

As soon as the robo-taxi industry gathers steam, Uber will ditch human drivers for self-driving technology saving billions in labor costs.

As it stands, Uber keeps cutting the incentive to drive for them with rates falling to as low as an average of $10 per hour now.

The golden age of being an Uber driver is long gone.

Uber is merely gathering enough data to prepare for the mass roll-out of automated cars that will shuttle passengers from point A to B.

It doesn’t matter that Lyft has gained market share from Uber. Lyft’s market share was in the teens a few years ago and has rocketed to 31% taking advantage of management problems over at Uber to wriggle its way to relevancy.

It does not reveal how poor of a company Uber is, but it demonstrates that Uber’s network is spread over different industries and the sum of the parts is a lot greater than Lyft can fathom.

Lyft is a pure ride-share company and brings in annual revenue that is 4 times less than Uber.

Naturally, Uber loses a lot more money than Lyft because they have so many irons in the fire.

But even a single iron could be a unicorn in its own right.

CEO Dara Khosrowshahi recently talked about its Uber Eats division in glowing terms and emphasized that over 70% of the American population will have access to Uber Eats by the end of next year.

Uber’s position in the American economy as a pure next-generation tech business reverberates with its investors causing Khosrowshahi to brazenly admit that Uber “suffers from having too much opportunity as a company.”

Ultimately, the amped-up growth of the food delivery unit feeds back into its ride-sharing division. These types of synergies from Uber’s massive network effect is what management desires and dovetails nicely together.

In 2018 alone, 40% of Uber Eat’s customers were first-time samplers.

A good portion of these customers have never tried Uber’s ride-sharing service and when they travel for business or leisure, they later adopt the ride-sharing platform leading to more Uber converts.

Uber Freight has enabled truckers to push a button and book a load at an upfront price revolutionizing the process.

The online food delivery service is the place to be right now and it would be worth your while to look at GrubHub (GRUB).

Quarterly sales are growing over 50% and quarterly EPS growth was 61% sequentially for this industry leader.

Profit Margins are in the mid-20% convincingly proving that the food delivery industry will not be relying on razor-thin margins.

Charging diners $5 for delivery and taking a cut from the restaurateurs have been a winning strategy that will resonate further as more diners choose to munch in the cozy confines of their house.

Blitzscaling has led Uber to the online food delivery business and they are pouring resources into it to juice up profits before they go public next year.

The ride-sharing business is a loss-making enterprise as of now, and Uber will need to exhibit additional ingenuity to leverage the existing network to find strong pockets of revenue.

I believe they have the talent on their books to achieve finding these strong pockets making this company an intriguing stock to buy in 2019.

November 19, 2018

Tech Letter

Mad Hedge Technology Letter
November 19, 2018
Fiat Lux

Featured Trade:

(ROKU’S UNASSAILABLE LEAD)
(TIVO), (ROKU), (NFLX), (AMZN), (CHTR), (DISH), (FB), (AAPL), (GOOGL)

Roku’s Unassailable Lead

Tech Letter

Shake off the rust.

That is exactly what management of a fast-growing tech company doesn’t want to hear.

Losing money isn’t fun. And investors only put up with it because of the juicy growth trajectories management promises.

Without the expectations of hard-charging growth, there is no attractive story in a world where investors need stories to rally behind.

Setting the bar astronomically high in the approach to management’s execution and product development will always be, the single most important element in a tech company.

This is the secret recipe for thwarting entropy and rising above the rest.

You might be shocked to find out that most tech firms die a harrowing death, the average Joe wouldn’t know that, with constant headlines glorifying our tech dignitaries.

Just look at the pageantry on display that was Amazon’s (AMZN) quest to find a second headquarter.

According to Apex Marketing, the hoopla that coalesced around Amazon’s year-long search netted Amazon $42 million in free advertising by tracking the absorbed inventory of exposure from print, TV, and online.

Social media traffic by itself rung up $8.6 million of freebies.

These days, tech really does sell itself, and I didn’t even mention the billions in tax breaks Amazon will harvest from their Willy Wonka and the Chocolate Factory style headquarter search.

The only thing I would have changed would have been extending the contest into the second year.

Amazon’s brand is probably the most powerful in the world, and that is not because they are in the business of only selling chocolate bars.

One company that might as well sell chocolate bars and has been stymied by the throes of entropy is TiVo (TIVO).

TiVo was once the darling of the technology world.

It was way back in 1999 when TiVo premiered the digital video recorder (DVR).

It modernized how television was consumed in a blink of an eye.

Broad-based adoption and outstanding product feedback were the beginning of a long love affair with diehard users wooed by the superior functionality of TiVo that allowed customers to record full seasons of television shows, and, the cherry on top, fast-forward briskly through annoying commercials.

The technology was certainly ahead of its time and TiVo had its cake and ate it for years.

The stock price, in turn, responded kindly and TiVo was trading at over $106 in August of 2000 before the dot com crash.

That was the high-water mark and the stock has never performed the same after that.

TiVo’s cataclysmic decline can be traced back to the roots of the late 90’s when a small up and coming tech company called Netflix (NFLX) quickly pivoted from mailing DVD’s to producing proprietary online streaming content.

Arrogant and set in their old ways, TiVo failed to capture the tectonic shift from analog television viewers cutting the cord and migrating towards online streaming services.

Consumer’s viewing habits modernized, and TiVo never developed another game-changing product to counteract the death of a thousand cuts to traditional television and its TiVo box that is still ongoing as I write this.

Like a sitting duck, Charter Communications (CHTR) and Dish Network (DISH) devoured TiVo’s market share in the traditional television segment constructing DVR’s for their own cable service.

And instead of licensing their technology before their enemies could build an in-house substitute, TiVo chose to sue them after the fact, resulting in a one-time payment, but still meant that TiVo was bleeding to death.

Enter Project Griffin.

Netflix (NFLX) spent years developing Project Griffin, an over-the-top (OTT) TV box that would host its future entertainment content and poured a bucket full of capital into the software and hardware of this revolutionary product.

Making the leap of faith from the traditional DVD-by-mail distribution model that would soon be swept into the dustbin of history was an audacious bet that looks even better with each passing year.

This Netflix branded OTT box was specifically manufactured for Netflix’s Watch Instantly video service.

In 2007, Netflix was just week’s away from rolling out the hardware from Project Griffin when CEO of Netflix Reed Hastings decided to trash the project.

His reason was that a branded Netflix box would hinder the software streaming content confining their growth trajectory to only their stand-alone platform.

This would prevent their streaming service to populate on other networks.

To avoid discriminating against certain networks was a genius move allowing Netflix to license digital content to anyone with a broadband connection, and giving them chance to make deals with other companies who had their own box.

It was the defining moment of Netflix that nobody knows about.

Netflix became ubiquitous in many Millennial households and Roku (ROKU) was spun-out literally bestowing new CEO of Roku Anthony Woods with a de-facto company-in-a-box to build on thanks to old boss Reed Hastings.

Woods cut his teeth borrowing TiVo’s technology and developed the digital video recorder (DVR) as the founder of ReplayTV before he joined Netflix and was the team leader of Project Griffin.

Now, he had a golden opportunity dropped into his lap and Woods ran with it.

Woods quickly became aware that hardware wasn’t the future of technology and switched to a digital ad-based platform model allowing any and all streaming services to launch from the Roku box.

No doubt Woods understood the benefits of being an open platform and not playing favorites to certain networks in a landscape where Apple (AAPL), Google (GOOGL), Facebook (FB), and Amazon have made “walled gardens” an important part of their DNA.

Democratizing its platform was in effect what the internet and technology were supposed to be from the onset and Roku has excavated value from this premise by playing nice with everyone.

This also meant scooping up all the ad dollars from everyone too.

At the same time, Wood’s mentor Hastings has rewritten the rules of the media industry parting the sea for Roku to mop up and dominate the OTT box industry with Amazon and Apple trailing behind.

Roku was perfectly positioned with a superior finished product, but also took note of the future and zigged and zagged when they needed to which is why ad sales have surpassed their hardware sales.

By 2021, over 50 million Americans will say adios to cable and satellite TV.

The addressable digital ad market is a growing $80 billion per year market and Roku will have a more than fair shot to secure larger market share.

The rock-solid foundations and handsome growth story are why the Mad Hedge Technology Letter is resolutely bullish on Roku and Netflix.

Roku and Netflix have continued to evolve with the times and TiVo is now desperately attempting to sell the remains of itself before the vultures feast on their corpse.

What is left is a portfolio of IP assets that brought in $826 million in 2017, and they have exited the hardware business entirely halting production of the iconic TiVo box.

Digesting 100% parabolic moves up in the share price is a great problem to have for Roku and Netflix.

These two are set to lead the online streaming universe and stoked by robust momentum to go with it.

The Mad Hedge Technology Letter currently holds a Roku December 2018 $30-$35 in-the-money vertical bull call spread bought at $4.35, and it is just the first of many tech trade alerts that will be connected to the rapidly advancing online streaming industry.

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THE FRUITS OF PROJECT GRIFFIN