Global Market Comments
November 1, 2018
Fiat Lux
Featured Trade:
(THE TERRIFYING CHART FORMATION THAT IS SETTING UP),
(SPY), (AMD), (MU), (AMZN), (NFLX),
(THE TECHNOLOGY NIGHTMARE COMING TO YOUR CITY)
Tag Archive for: (NFLX)
The Mad Hedge Fund Trader is seeing its biggest one-day gains since the inception of our Trade Alert Service 11 years ago. By the time you read this, we will have picked up an astounding 11% profit for the entire portfolio in 24 hours.
However, this being Halloween, I don’t want to sound like I’m whistling by the graveyard. But what I am about to say will scare the daylights out of you.
I hate to say I told you so but my prediction a year ago that the bull market would end on May 10, 2019 at 4:00 PM is starting to look pretty good.
If I am right, the charts for the S&P 500 (SPY) are setting up a classic head and shoulders top. The left shoulder was created by the January 2018 rally to $282.
We just saw the head created at the beginning of October at $293. All that remains is to build the right shoulder back up to $282 by the spring. What will then follow is the crying.
This is not a matter of throwing a dart at a calendar or reciting a chant taught to me by a long-dead Yaqui Indian. It is a simple matter of math. Here’s how it goes:
*The Fed Raises funds rate 25 basis points per quarter for the next four quarters to 3.25%
*The Yields Curve Inverts, taking short rates higher than long rates now at 3.15%
*Bond yield spread trades increase massively going into the inversion as traders ramp up the size to make up for shrinking spreads.
*When the spread turns negative, they dump everything, creating an interest rate spike to 4% or 5%.
*Inverted yield curves last an average of 14 months or until February 2020 in this cycle when a recession begins.
*Stock markets peak on average seven months before recessions, and you arrive at Friday, May 10, 2019 at 4:00 PM EST as the date for the demise of the bull market. At that point, it will be ten years and two months old, the longest such move in history.
A lot of people asked why I sent out so few trade alerts during the summer and going into the fall.
In fact, the list of negatives has reached laughable proportions:
*Longest bull market in history
*In the face of rising interest rates
*In the face of rising oil prices
*Rising inflation
*Nothing else to buy
*Only bull market in the world
*Valuations approaching two-decade highs
*Overwhelmingly concentration in big cap tech
*Double top in the market on an Equal Weight S&P 500 chart
*Record retail inflows into ETFs
*Recession has already started in the auto industry
*Recession has already started in the housing industry
*Rotation to value defensive stocks underway
*Massive unicorn IPOs planned in 2019- $215 billion
*Slowing GDP Growth 4.2% to 3.5%
*Large amount of economic growth sucked forward from 2019 as businesses accelerate Chinese imports to beat the tariffs
*The same is going on in China to buy our exports
Should you throw up your hands, dump all your stocks, and hide out in cash?
Absolute not! In fact, the last six months of a bull market are often the most profitable. Many tech stocks like Micron Technology (MU) and Advanced Micro Devices (AMD) have dropped by half in recent months. That means they have to double to get back to their old highs.
Other big quality stocks such as Amazon (AMZN) and Netflix (NFLX) have plunged by 30% and only have to appreciate by 43% to hit highs. It is, in fact, the best entry point for large-cap tech stocks since 2015 with valuations at a three-year low.
If I am wrong, the trade war with China plunges us into recession and ends the bull market sooner. Almost all the “worry” items on the list above are getting worse by the day.
Save That Date!
Global Market Comments
October 29, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE COMING 2018 REPLAY),
(TLT), (SPY), (VIX), (VXX), (AAPL),
(FB), (AMZN), (NFLX), (TESLA),
(A COW-BASED ECONOMICS LESSON)
If you missed 2018, you get to do it all over again. That’s what the major indexes are offering us after giving up all of this year’s gains, and then some.
We go into the coming week with markets giving their most oversold readings since the popping of the 2000 Dotcom bubble and the 1987 crash. Markets are shouting imminent recession loud and clear.
Except that markets have discounted 13 out of the last six recessions and it is currently discounting one of those non-recessions.
Here is my calendar of upcoming potential market bottoms. Please note that all are within the next seven trading days.
October 29-reversal day of the Friday selloff.
October 31-rebalancing of funds will require a large amount of equity buying for month end. Facebook (FB) reports.
November 1-the Apple (AAPL) earnings are out.
November 7-the midterm elections.
There is no way that we are going into a recession and a bear market now. That is 2019 business. Bear markets don’t begin with real interest rates at zero which they are at now (3.1% ten-year Treasury yield – 3.1% inflation rate = zero). And they may well still be at zero in a year (4% ten-year Treasury yield – 4% inflation rate= zero).
Earnings are still great in the technology area, 50% of the national total. The Dotcom market top was characterized by the collection of vast numbers of eyeballs, not actual cash.
This means that you want to buy the big dips. This is the best entry point for blue-chip technology stocks since 2015. With a price earnings multiple now at 14.9 times 2019 earnings, stocks have given up half the valuation gains since the 2009 market bottom IN A MONTH!
Global trade is collapsing. There is no doubt that businesses massively pulled forward orders to beat the administration’s punitive import duties, thus artificially boosting the Q3 GDP numbers.
The chickens will come to roost in Q1 2019 which is what the stock market may be screaming at us right now with its nightmarish price action.
The big print of the week was the Q3 GDP at 3.5%, down substantially from the 4.2% figure for Q2. That may be the last hot number we see for many years as the tax cuts and spending burst wear off. Next year we return to the long-term average of 2.5%...I hope. If I’m wrong we’ll see zero growth in 2019.
Tesla (TSLA) announced a profit for the first time since 2016, sending the shares soaring. The stock is back up to the level that prevailed before Elon Musk’s last nervous breakdown. Tesla 3’s are flooding the streets of California.
In the meantime, the economic data remains hot with Weekly Jobless Claims still hugging an all-time low at 215,000. But it is all backward-looking data.
Of course, the highlight of the week was the Mad Hedge Lake Tahoe Conference which couldn’t have taken place in more ideal conditions. The food was outstanding, the bottles of Caymus cabernet were fast-flowing, and we even had the option of crashing the wedding in the ballroom next door (I saw some incredibly hot distant cousins).
While I lectured away on the prospects for markets and interest rates, children built sandcastles outside on the balmy Tahoe beach 20 feet away. We had a lot of doctors attend this year and I have to admit it was the first time I was offered a colonoscopy in exchange for a newsletter subscription.
Good cheer was had by all and there was a lot of exchanging of trading tips, email addresses, and phone numbers. It is clear the readers are making fortunes with my service. Most have already committed to coming back next year.
My year-to-date performance has faded to a still market-beating 22.37%, and my trailing one-year return stands at 30.68%. October is down -6.02%, despite a gut-punching, nearly instant NASDAQ swoon of 13.7%. Most people will take that in these horrific conditions.
My single stock positions have been money makers, but my short volatility position (VXX), which I put on way too early, was a disaster eating up all of my profits. I bought puts with the (VXX) at $30. It hit an incredible $42 on Friday. That's why you only take on small 5% positions in outright volatility securities.
My nine-year return retreated to 298.84%. The average annualized return stands at 34.58%. Global Trading Dispatch is now only 44 basis points from an all-time high.
The Mad Hedge Technology Letter has done an outstanding job in October, giving back only -0.89% despite having an aggressively long portfolio. It still maintains an impressive annualized 20.31% profit. It almost completely missed the tech meltdown and then went aggressively long our favorite names right at the market bottom.
This coming week will be focused on the trifecta of jobs data and a few blockbuster technology earnings reports.
Monday, October 29 at 8:30 AM, the October Dallas Fed Manufacturing Survey is out.
On Tuesday, October 30 at 9:00 AM, the Corelogic S&P 500 Case-Shiller Home Price Index is released. Facebook (FB) and FireEye (FEYE) report. earnings.
On Wednesday, October 24 at 8:15 AM, the ADP Employment Report is published, a read on private hiring.
At 10:30 AM the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.
Thursday, October 25 at 8:30, we get Weekly Jobless Claims. Apple (AAPL) reports.
On Friday, October 26, at 8:30 AM, the October Nonfarm Payroll Report is announced. The Baker-Hughes Rig Count follows at 1:00 PM.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 23, 2018
Fiat Lux
Featured Trade:
(WATCH OUT FOR THE UNICORN STAMPEDE IN 2019),
(TSLA), (NFLX), (DB), (DOCU), (EB), (SVMK), (ZUO), (SQ),
(A NOTE ON OPTIONS CALLED AWAY), (MSFT)
I am always watching for market topping indicators and I have found a whopper. The number of new IPOs from technology mega unicorns is about to explode. And not by a little bit but a large multiple, possibly tenfold.
Six San Francisco Bay Area private tech companies valued by investors at more than $10 billion each are likely to thunder into the public market next year, raising buckets of cash for themselves and minting new wealth for their investors, executives, and employees on a once-unimaginable scale.
Will it kill the goose that laid the golden egg?
Newly minted hoody-wearing millionaires are about to stampede through my neighborhood once again, buying up everything in sight.
That will make 2019 the biggest year for tech debuts since Facebook’s gargantuan $104 billion initial public offering in 2012. The difference this time: It’s not just one company, and five of them are based in San Francisco, which could see a concentrated injection of wealth as the nouveaux riches buy homes, cars and other big-ticket items.
If this is not ringing a bell with you, remember back to 2000. This is exactly the sort of new issuance tidal wave that popped the notorious Dotcom Bubble.
And here is the big problem for you. If too much money gets sucked up into the new issue market, there is nothing left for the secondary market, and the major indexes can fall, buy a lot.
The onslaught of IPOs includes ride-sharing firm Uber at $120 billion, home-sharing company Airbnb at $31 billion, data analytics firm Palantir at $20 billion, FinTech company Stripe at $20 billion, another ride-sharing firm Lyft at $15 billion, and social networking firm Pinterest at $12 billion.
Just these six names alone look to absorb an eye-popping $218 billion, and that does not include hundreds of other smaller firms waiting on the sidelines looking to tap the public market soon.
The fear of an imminent recession starting sometime in 2019 or 2020 is the principal factor causing the unicorn stampede. Once the economy slows and the markets fall, the new issue market slams shut, sometimes for years as they did after 2000. That starves rapidly growing companies of capital and can drive them under.
For many of these companies, it is now or never. The initial venture capital firms that have had their money tied up here for a decade or more want to cash out now and roll the proceeds into the “next big thing,” such as blockchain, health care, or artificial in intelligence. The founders may also want to raise some pocket money to buy that mansion or mega yacht.
Or, perhaps they just want to start another company after a well-earned rest. Serial entrepreneurs like Tesla’s Elon Musk (TSLA) and Netflix’s Reed Hastings (NFLX) are already on their second, third, or fourth startups.
And while a sudden increase in new issues is often terrible for the market, getting multiple IPOs from within the same industry, as is the case with ride-sharing Uber and Lyft, is even worse. Remember the five pet companies that went public in 1999? None survived.
The move comes on the heels of an IPO market in 2018 that was a huge disappointment. While blockbuster issues like Dropbox (DB) and DocuSign (DOCU) initially did well, Eventbrite (EB), SurveyMonkey (SVMK), and Zuora (ZUO) have all been disasters.
Some 80% of all IPOs lost money this year. This was definitely NOT the year to be a golfing partner or fraternity brother with a broker.
What is so unusual in this cycle is that so many firms have left going public to the last possible minute. The desire has been to milk the firms for all they are worth during their high growth phase and then unload them just as they go ex-growth.
The ramp has been obvious for all to see. In the first nine months of 2018, 44 tech IPOs brought in $17 billion, according to Dealogic. That’s more than tech IPOs reaped for all of 2016 and 2017 combined.
Also holding back some firms from launching IPOs is the fear that public markets will assign a lower valuation than the last private valuation. That’s an unwelcome circumstance that can trigger protective clauses that reward early investors and punish employees and founders. That happened to Square (SQ) in its 2015 IPO.
That’s happening less and less frequently: In 2017, one-third of IPOs cut companies’ valuations as they went from private to public. In 2018, that ratio has dropped to one in six.
Also unusual this time around is an effort to bring in more of the “little people” in the IPO. Gig economy companies like Uber and Lyft are lobbying the SEC for changes in new issue rules that will enable their drivers to participate even though they may be financially unqualified.
As a result, when the end comes, this could come as the cruelest bubble top of all.
Don’t Get Run Over
Mad Hedge Technology Letter
October 17, 2018
Fiat Lux
Featured Trade:
(THE SPOTIFY REGIME),
(SPOT), (AAPL), (NFLX), (MSFT), (AMZN), (GS)
It’s not earth-shattering to concede that our attention spans have shrunk and as a result, there are unintended consequences.
The various smart devices and other technology vying for a slice of your precious attention have been accepted as the new normal.
Whether it’s binging on Netflix (NFLX) or gaming on a Microsoft Xbox (MSFT), consumers are absorbed obsessively staring into a screen most of the day.
As tech penetrates the core of our existence, the music industry has been the recipient of changes that were hard to fathom just a few years ago.
And as all businesses morph into pseudo-tech enterprises supported by data analytic teams, management is able to unearth some compelling data and utilize it to commercialize the audience.
Spotify (SPOT), the world’s leading music streaming platform, doesn’t monetarily reward music artists unless a stream surpasses a minimum of 30 seconds.
This is just one way that Spotify’s founder and CEO Daniel Ek has changed the music industry.
Think about the implications.
Gone are the elaborate instrumentals to warm listeners up before a catchy chorus hooks you forever.
Songs are entirely front loaded now with the end goal of persuading listeners to not swipe until the 30-second barrier is passed.
Whatever happens after that doesn’t matter – the song might as well go silent because Spotify will pay the artist.
According to Spotify data, Ed Sheeran’s “The Shape of You” is Spotify’s most-streamed song with 1.94 billion listens.
This is just one scant nugget of data in Spotify’s treasure trove of global music data that finely chronicles the state of the music industry and how consumers devour music.
Spotify CFO Barry McCarthy promptly explained the Spotify’s relationship with data and music at the Goldman Sachs’ (GS) Communacopia conference by saying, “The company with the most data wins. The company with the most data insights wins. The company with the engineering culture, software-driven business wins. And that’s the play we’re making.”
In the current tech climate, I will take software over hardware any day of the week.
Hardware sales are a one-off event until the next cycles bring an upgraded iteration which could take years to execute.
Software sales are an annual recurring revenue stream that is as sticky as the software's quality giving hope to company CFO’s of a perpetual income stream.
It doesn’t matter that Spotify isn’t profitable. The end goal isn’t to make money in an industry that is notoriously difficult to combat the royalty expenses eroding 70% of every $1 of revenue.
What has happened is that Spotify is too big to fail and it loves every second of it.
The music industry needs Spotify just as much as Spotify needs the music industry and this awkward partnership is far from a match made in heaven, but it works for the foreseeable future.
It helps that artists, for the most part, have bought into the data-based streaming model.
Music artists have turned into tech-like firms themselves.
Their new goal is to compile an audience then monetize like Spotify itself.
It speaks volumes of how the tech model has penetrated every corner of the world.
Apple (AAPL) is acutely aware of the potency a music streaming service offers and has been investing in Apple Music, its music streaming arm.
Rumors have been swirling that Apple absorbed the entire staff of a music analytics firm called Asaii including the owners, for a tad under $100 million.
This talent grab on the heels of the Shazam purchase indicates that Apple seeks a better understanding of how to curate music playlists and better serve music fans who own Apple devices.
Even though Apple has the second leading music streaming service, they have ceded the battle to Spotify.
CEO of Apple Time Cook is on record saying, “We’re not in it for the money.”
Indirectly, Cook means Apple Music is a loss-making division and he doesn’t care because it is just a small fragment of what makes Apple one of the best companies in the world.
Apple has also commissioned 24 television shows and 2 films costing them $1 billion.
A single billion is peanuts considering the eye-popping amount of Apple’s cash hoard. They can afford to take the long-term view and slowly enhance the ecosystem instead of Spotify whose eggs are all in one basket.
Apple is more concerned about offering iOS users the best experience possible and in return Cook hopes to count on them to use iOS devices for a lifetime.
Apple Music’s biggest weakness is its biggest strength.
In short, Apple music is tailored to the iOS operating system.
If you sign up, the app directs users to sign up for an Apple ID if you do not already have one.
Android lovers have little interest in signing up for Apple Music considering they do not have an Apple device and then must pay $9.99 per month after the introductory 3-month offer expires when Spotify is free. It’s not worth the extra hassle.
It is almost certain that Spotify will enact an Android operating system pivot to build a moat around its business and that is something Apple cannot do.
Spotify will start partnering with Samsung, Microsoft, and the Android-based Asian manufacturers to focus on monetizing the Android audience and make it even more inconvenient for listeners to access Apple Music.
Signing up for Spotify and listening to its ad-free subscription without creating an Apple ID is more appealing.
And after three months, users have the option to continue a free version of Spotify, albeit with digital ads popping up.
This leads me to the belief that there is definitely space for more than one player in the music streaming industry.
Amazon is another tech firm who has a music streaming service but are more concerned if they convert users into prime memberships.
If compiling the most music data wins out, then Spotify is in the lead with its 83 million paid users and 101 million free users.
Apple trails in second place with 50 million users which is still an extraordinary number of listeners and easily monetizable.
The way music streaming platforms works is that users are more likely to listen to the most popular artists and songs and not look for an adventure.
The app is merely there to locate the songs they already like or click on a recommendation produced by an algorithm.
It’s not like going out on a Friday night to experience some unknown singer in a grunge basement and becoming a new fan. Users know what they want, and they desire to access it. Such is the nature of internet search.
Spotify’s data shows that out of 3 million artists on the platform, 200,000 artists receive 70% of the music streams, clearly segmenting the haves and have-nots.
The rest of the 2.8 million are struggling to be discovered and cannot cut a wage off of Spotify’s platform.
Online music streaming products also align perfectly well with artificial intelligence-based voice activation technology.
These services will deeply integrate this technology into its services as they desire to ramp up the quality of services.
As for the music streaming business hopefuls, it's game over as the three major players have the leverage to put out any fires that crop up.
When you break it down, Spotify has a 180 million user audience growing at 30% YOY and is hellbent on becoming profitable.
As they enhance the platform’s tools and services, gradually expect more subscription-based products to entertain users.
And even if Spotify doesn’t become profitable as soon as they would like, the aggregate hoard of data will multiply in value.
Spotify is already the most prized music asset in the world with a market cap of $26 billion, about $10 billion higher than all global music revenues.
Yes, Spotify destroyed album artwork and its audio quality of 320 kilobits per second is no match for CD-quality audio. But this is the world we live in today and Daniel Ek’s Spotify is the 800-pound gorilla in the room.
Spotify is a great long-term buy-and-hold asset. Take the latest weakness to add to your position.
Global Market Comments
October 12, 2018
Fiat Lux
Featured Trade:
(WHY THE STOCK MARKET IS BOTTOMING HERE),
(SPY), (INDU),
(NETFLIX SAYS WE BECOME A NATION OF COUCH POTATOES),
(NFLX), (M), (AMZN), (TSLA), (DIS), (GOOG)
While much of the artificial intelligence focus has been on Amazon (AMZN), Apple (AAPL), Tesla (TSLA), and Alphabet (GOOG) this year, there is another firm in the field making money hand over fist.
That would be Netflix (NFLX), whose earnings have been on a tear all year, sending the shares soaring.
By this summer the company boasted a staggering 130 million subscribers, with much of the recent growth coming from overseas.
Traders went gaga over the numbers.
Indeed, the firm tracks every keystroke you make.
Watch the sultry tropical thriller Bloodline (sadly scheduled for cancellation), and the company’s clever AI will steer you straight into a like-minded series.
It’s like the “roach motel” network. Once you check in, you can never check out.
Analysts briefly worried about Netflix when Disney (DIS) announced it was pulling its offerings from the omniscient online streaming company, a major seller.
To watch Buzz Lightyear, Woody, and an interminable number of nearly identical princesses (I have three daughters) you’ll have to seek out Disney’s own distribution channel sometime in the future.
But the firm shot back with an $8 billion budget for original content for 2018, in one fell swoop making it one of the largest Hollywood production firms.
Now Netflix is a regular feature of the annual Oscar presentations. Last month it won an impressive 23 Emmys, tying AT&T Warner Media’s HBO for the first time.
They say a picture is worth a thousand words, and I just found 3,000 of them.
Look at three stock charts and you will immediately understand some of the most important structural trends now sweeping through our economy.
Those would be the charts for Amazon (AMZN), Netflix (NFLX), and Macy's (M).
Retail Sales are clearly in a secular long-term decline. Indeed, Macy’s (M) announced last year that it is closing 100 of its 769 stores.
Are these numbers revealing a major new trend in our society? Are we soon to have our every need catered to without lifting a finger?
Have We Become a Nation of Couch Potatoes?
After spending weeks preparing a major research piece for a private client on artificial intelligence, I would have to say that the answer is an overwhelming “Yes!”
Artificial intelligence, or AI, is far more pervasive than you think. Half of all apps now rely on some form of AI, and within five years, all of them will.
Within a decade, AI will cure cancer and most other human maladies, drive our cars, decide our elections, and do our shopping.
You probably all know that Northern California has been besieged with wildfires lately.
Guess what has suddenly started populating my screen? Adds for smoke detectors!
AI has become the leading market theme for 2018.
People my age all remember George Jetson, the space age cartoon series, who only had to work an hour a day because machines did the rest of the work for him.
The modern incarnation of his ultra-light workweek will be far darker and more sinister.
Instead of a one-hour day, it is far more likely that one person will keep a full time eight-hour a day job, while another seven unfortunates become full time unemployed.
By the way, I am determined to be that one guy with a job. So should you.
Indeed, I am increasingly coming across dire predictions that 30% of all jobs will disappear within ten years.
I’m sure that they will.
The real question is whether that 30%, or more, will be replaced by jobs yet to be invented. I bet they will.
Evolution and creative destruction are now happening on fast forward.
After all, some 25% of the professions listed on the Department of Labor website did not exist a decade ago.
SEO manager? Concert social media buzz creator? Online affiliate manager? Solar panel installer? Reputation defender?
What does the stock market do in this new dystopian society? It goes through the roof.
After all, far fewer workers creating a greater output generate much larger earnings that send share prices soaring.
It is all a crucial part of my “Golden Age” scenario for the 2020s.
Having said all that, I think I’ll go binge-watch Netflix’s tropical film noir “Bloodline.” I hear it’s hot.
“Game of Thrones” and “House of Cards” don’t restart until next year.
Our Future?