Posts

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 21, 2019

Global Market Comments
August 21, 2019
Fiat Lux

Featured Trade:

(WHY YOU MIISED THE TECHNOLOGY BOOM AND WHAT TO DO ABOUT IT NOW),
(AAPL), (AMZN), (MSFT), (NVDA), (TSLA), (WFC), (FB)

July 16, 2019

Global Market Comments
July 16, 2019
Fiat Lux

Featured Trade:

(THE BIGGEST TELL IN THE MARKET RIGHT NOW),
(GOOGL), (FRC), (PINS), (WORK), (UBER),
 (ADSK), (WDAY), (SNE), (NVDA), (MSFT),
(POPULATION BOMB ECHOES),
(CORN), (WEAT), (SOYB), (DBA), (MOS)

The Biggest “Tell” in the Market Right Now

I am constantly looking for “tells” in the market, little nuggets of information that no one else notices, but gives me a huge trading advantage.

Well, there is a big one out there right now. San Francisco commercial real estate prices are going through the roof, smashing new all-time records on a monthly, if not weekly, basis.

The message for you traders is loud and clear. You should be picking up the highest quality technology growth stocks on every dip for they all know some things that you don’t. Their businesses are about to triple, if not quadruple, over the coming decade.

Technology stocks, which now account for 26% of stock market capitalization, will make up more than half of the market within ten years, much of that through stock price appreciation. And they are all racing to lock up the office space with which to do that….now.

San Francisco office rents reached a record in June as the continued growth of tech — now turbocharged by nearly $100 billion in new capital raised in a series of initial public offerings — met a severe space crunch.

Asking rents rose to a staggering $84.16 per square foot annually for the newest and highest quality offices in the central business district and citywide asking rents for such spaces known as Class A are up over 9% from the prior year. The citywide office vacancy rate was 5.5% in June, down from 7.4% a year ago.

Demand shows no sign of stopping. Brokerage CBRE reported around 20 large tenants are seeking more space. Google and Facebook each want to lease as much as 1 million square feet in additional San Francisco office space — room for more than 6,500 employees.

Google (GOOGL) confirmed on Tuesday that it recently signed an office lease at the Ferry Building, its fifth expansion since 2018.

First Republic Bank (FRC) signed the biggest lease of the second quarter. It expanded by 265,000 square feet at 1 Front St. Financial firms and companies in other sectors continue to scrap with tech companies for space.

What’s the tech connection here? The bank’s expansion is fueled largely by the rise of tech. Its clients include wealthy tech employees, and it could benefit from the wave of local stock-market debuts — an example of how the booming tech sector also lifts the financial sector.

In addition, local Bay Area home prices could get a turbocharger by the fall when restrictions on stock sales expire for some companies that went public in the spring.

San Francisco companies that have gone public continue to grow by leaps and bounds. Pinterest (PINS), Slack (WORK), and Uber (UBER) also signed office leases this year with room for thousands of new employees.

Tech companies Autodesk (ADSK) and Glassdoor also signed deals at 50 Beale St. in the spring. In a sign of the city’s rapidly changing economy, old line construction firm Bechtel and Blue Shield, the legacy health insurer, are both moving out of 50 Beale St. Sensor maker Samsara, software firm Workday (WDAY), and Sony’s (SNE) PlayStation video game division also expanded.

Globally, San Francisco has the seventh-highest rents in prime buildings. It’s still behind financial powerhouses Hong Kong, London, New York, Beijing, Tokyo and New Delhi (San Francisco’s average office rents beat out New York.)

Downtown San Francisco’s office costs in top buildings, including service charges and taxes, are $130 per square foot, while Hong Kong’s Central district is the world’s highest at $322 per square foot.

Only a handful of new office projects are being built, and future supply is further constrained by San Francisco’s Proposition M which limits the amount of office space that can be approved each year. That is creating a steadily worsening structural shortage. Only two large office projects are under construction without tenant commitments.

Which tech stocks should you be picking up now? NVIDIA (NVDA) has recently suffered a major haircut, thanks to the trade war with China. Microsoft (MSFT) seems hellbent on making its way from $140 to $200 a share due to its massive expansion into the cloud.

 

 

Suddenly, it’s Getting Crowded in San Francisco

July 3, 2019

Mad Hedge Technology Letter
July 3, 2019
Fiat Lux

Featured Trade:

(CHIPS ARE BACK FROM THE DEAD)
(XLNX), (HUAWEI), (AAPL), (AMD), (TXN), (QCOM), (ADI), (NVDA), (INTC)

Chips are Back from the Dead

The overwhelming victors of the G20 were the semiconductor companies who have been lumped into the middle of the U.S. and China trade war.

Nothing substantial was agreed at the Osaka event except a small wrinkle allowing American companies to sell certain chips to Huawei on a limited basis for the time being.

As expected, these few words set off an avalanche of risk on sentiment in the broader market along with allowing chip companies to get rid of built-up inventory as the red sea parted.

Tech companies that apply chip stocks to products involved with value added China sales were also rewarded handsomely.

Apple (AAPL) rose almost 4% on this news and many investors believe the market cannot sustain this rally unless Apple isn’t taken along for the ride.

Stepping back and looking at the bigger picture is needed to digest this one-off event.

On one hand, Huawei sales comprise a massive portion of sales, even up to 50% in Nvidia’s case, but on the other hand, it is the heart and soul of China Inc. hellbent on developing One Belt One Road (OBOR) which is its political and economic vehicle to dominate foreign technology using Huawei, infrastructure markets, and foreign sales of its manufactured products.

Ironically enough, Huawei was created because of exactly that – national security.

China anointed it part of the national security apparatus critical to the health and economy of the Chinese communist party and showered it with generous loans starting from the 1980s.

China still needs about 10 years to figure out how to make better chips than the Americans and if this happens, American chip sales will dry up like a puddle in the Saharan desert.

Considering the background of this complicated issue, American chip companies risk being nationalized because they are following the Chinese communist route of applying the national security tag on this vital sector.

Huawei is effectively dumping products on other markets because private companies cannot compete on any price points against entire states.

This was how Huawei scored their first major tech infrastructure contract in Sweden in 2009 even though Sweden has Ericsson in their backyard.

We were all naïve then, to say the least.

Huawei can afford to take the long view with an Amazon-like market share grab strategy because of possessing the largest population in the world, the biggest market, and backed by the state.

Even more tactically critical is this new development crushes the effectiveness of passive investing.

Before the trade war commenced, the low-hanging fruit were the FANGs.

Buying Google, Amazon, Apple, Netflix, and Facebook were great trades until they weren’t.

Things are different now.

Riding on the coattails of an economic recovery from the 2008 housing crisis, this group of companies could do no wrong with our own economy flooded with cheap money from the Fed.

Well, not anymore.

We are entering into a phase where active investors have tremendous opportunities to exploit market inefficiencies.

Get this correct and the world is your oyster.

Get this wrong, like celebrity investors such as John Paulson, who called the 2008 housing crisis, then your hedge fund will convert to a family office and squeeze out the extra profit through safe fixed income bets.

This is another way to say being put out to pasture in the financial world.

My point being, big cap tech isn’t going up in a straight line anymore.

Investors will need to be more tactically cautious shifting between names that are bullish in the period of time they can be bullish while escaping dreadful selloffs that are pertinent in this stage of the late cycle.

In short, as the trade winds blow each way, strategies must pivot on a dime.

Geopolitical events prompted market participants to buy semis on the dips until something materially changes.

This is the trade today but might be gone with one Tweet.

If you want to reduce your beta, then buy the semiconductor chip iShares PHLX Semiconductor ETF (SOXX).

I will double down in saying that no American chip company will ever commit one more incremental cent of capital in mainland China.

That ship has sailed, and the transition will whipsaw markets because of the uncertainty in earnings.

The rerouting of capital expenditure to lesser-known Asian countries will deliver control of business models back to the corporation’s management and that is how free market capitalism likes it.

Furthermore, the lifting of the ban does not include all components, and this could be a maneuver to deliver more face-saving window-dressing for Chairman Xi.

In reality, there is still an effective ban because technically all chip components could be regarded as connected to the national security interests of the U.S.

Bullish traders are chomping at the bit to see how these narrow exemptions on non-sensitive technologies will lead to a greater rapprochement that could include the removal of all new tariffs imposed since last summer.

The risk that more tariffs are levied is also high as well.

I put the odds of removing tariffs at 30% and I wouldn’t be surprised if the administration doubles down on China to claim a foreign policy victory leading up to the 2020 election which could be the catalyst to more tariffs.

It’s difficult to decode if U.S. President Trump’s statements carry any real weight in real time.

The bottom line is the American government now controls the mechanism to when, how, and the volume of chip sales to Huawei and that is a dangerous game for investors to play if you plan on owning chip stocks that sell to Huawei.

Artificial intelligence or 5G applications chips are the most waterlogged and aren’t and will never be on the table for export.

This means that a variety of companies pulled into the dragnet zone are Intel (INTC), Nvidia (NVDA), and Analog Devices (ADI) as companies that will be deemed vital to national security.

These companies all performed admirably in the market following the news, but that could be short lived.

Other major logjams include Broadcom’s future revenue which is in jeopardy because of a heavy reliance on Huawei as a dominant customer for its networking and storage products.

Rounding out the chip sector, other names with short-term bullish price action are Qualcomm (QCOM) up 2.3%, Texas Instruments (TXN) up 2.6%, and Advanced Micro Devices (AMD) up 3.9%.

(AMD) is a stock I told attendees at the Mad Hedge Lake Tahoe conference to buy at $18 and is now above $31.

Xilinix (XLNX) is another integral 5G company in the mix that has their fortunes tied to this Huawei mess.

Investors must take advantage of this short-term détente with a risk on, buy the dip trade in the semi space and be ready to rip the cord on the first scent of blood.

That is the market we have right now.

If you can’t handle this environment when there is blood in the streets, then stay on the sidelines until there is another market sweet spot.

 

May 22, 2019

Global Market Comments
May 22, 2019
Fiat Lux

SPECIAL ARTIFICIAL INTELLIGENCE ISSUE

Featured Trade:

(HERE’S AN EASY WAY TO PLAY ARTIFICIAL INTELLIGENCE),
(BOTZ), (NVDA), (ISRG)
(FRIDAY, JULY 5 CAIRO, EGYPT GLOBAL STRATEGY DINNER)

Here’s an Easy Way to Play Artificial Intelligence

We are now in the throes of a market correction that could last anywhere from a couple of more week to a couple of months. So, generational opportunities are starting to open up in some of the best long term market sectors.

Suppose there was an exchange-traded fund that focused on the single most important technology trend in the world today.

You might think that I was smoking California’s largest export (it’s not grapes). But such a fund DOES exist.

The Global X Robotics & Artificial Intelligence ETF (BOTZ) drops a golden opportunity into investors’ laps as a way to capture part of the growing movement behind automation.

The fund currently has an impressive $2.2 billion in assets under management.

The universal trend of preferring automation over human labor is spreading with each passing day. Suffice to say there is the unfortunate emotional element of sacking a human and the negative knock-on effect to the local community like in Detroit, Michigan.

But simply put, robots do a better job, don’t complain, don’t fall ill, don’t join unions, or don’t ask for pay rises. It’s all very much a capitalist’s dream come true.

Instead of dallying around in single stock symbols, now is the time to seize the moment and take advantage of the single seminal trend of our lifetime.

No, it’s not online dating, gambling, or bitcoin. It’s Artificial Intelligence.

Selecting individual stocks that are purely exposed to AI is a challenging endeavor. Companies need a way to generate returns to shareholders first and foremost, hence, most pure AI plays do not exist right now.

However, the Mad Hedge Fund Trader has found the most unadulterated AI play out there. A real diamond in the rough.

The best way to expose yourself to this AI trend is through Global X Robotics & Artificial Intelligence ETF (BOTZ).

This ETF tracks the price and yield performance of ten crucial companies that sit at the forefront of the AI and robotic development curve. It invests at least 80% of its total assets in the securities of the underlying index. The expense ratio is only 0.68%.

Another caveat is that the underlying companies are only derived from developed countries. Out of the 10 disclosed largest holdings, seven are from Japan, two are from Silicon Valley, and one, ABB Group, is a Swedish-Swiss multinational headquartered in Zurich, Switzerland.

Robotics and AI walk hand in hand, and robotics are entirely dependent on the germination prospects of AI. Without AI, robots are just a clunk of heavy metal.

Robots require a high level of AI to meld seamlessly into our workforce. The stronger the AI functions, the stronger the robot’s ability, filtering down to the bottom line.

AI-embedded robots are especially prevalent in military, car manufacturing, and heavy machinery. The industrial robot industry projects to reach $80 billion per year in sales by 2024 as more of the workforce gradually becomes automated.

The robotic industry has become so prominent in the automotive industry that they constitute greater than 50% of robot investments in America.

Let’s get the ball rolling and familiarize readers of the Global Trading Dispatch with the top 5 weightings in the underlying ETF (BOTZ).

Nvidia (NVDA)

Nvidia Corporation is a company I often write about as their main business is producing GPU chips for the video game industry.

This Santa Clara, California-based company is spearheading the next wave of AI advancement by focusing on autonomous vehicle technology and AI-integrated cloud data centers as their next cash cow.

All these new groundbreaking technologies require ample amounts of GPU chips. Consumers will eventually cohabitate with state of the art IOT products (internet of things), fueled by GPU chips coming to mass market like the Apple Homepod.

The company is led by genius Jensen Huang, a Taiwanese American, who cut his teeth as a microprocessor designer at competitor Advanced Micro Devices (AMD).

Nvidia constitutes a hefty 8.70% of the BOTZ ETF.

To visit their website, please click here.

Yaskawa Electric (Japan)

Yaskawa Electric is the world’s largest manufacturer of AC Inverter Drives, Servo and Motion Control, and Robotics Automation Systems, headquartered in Kitakyushu, Japan.

It is a company I know well, having covered this former zaibatsu company as a budding young analyst in Japan 45 years ago.

Yaskawa has fully committed to improving global productivity through automation. It comprises the 2nd largest portion of BOTZ at 8.35%.

To visit Yaskawa’s website, please click here.

Fanuc Corp. (Japan)

Fanuc was another one of the hot robotics companies I used to trade in during the 1970s, and I have visited their main factory many times.

The 3rd largest portion in the (BOTZ) ETF at 7.78% is Fanuc Corp. This company provides automation products and computer numerical control systems and is headquartered in Oshino, Yamanashi.

They were once a subsidiary of Fujitsu, which focused on the field of numerical control. The bulk of their business is done with American and Japanese automakers and electronics manufacturers.

They have snapped up 65% of the worldwide market in the computerized numerical device market (CNC). Fanuc has branch offices in 46 different countries.

To visit their company website, please click here.  

Intuitive Surgical (ISRG)

Intuitive Surgical Inc (ISRG) trades on Nasdaq and is located in sun-drenched Sunnyvale, California.

This local firm designs, manufactures, and markets surgical systems and is completely industriously focused on the medical industry.

The company’s da Vinci Surgical System converts surgeon’s hand movements into corresponding micro-movements of instruments positioned inside the patient.

The products include surgeon’s consoles, patient-side carts, 3D vision systems, da Vinci skills simulators, da Vinci Xi integrated table motions.

This company comprises 7.60% of BOTZ. To visit their website, please click here.

Keyence Corp (Japan)

Keyence Corp is the leading supplier of automation sensors, vision systems, barcode readers, laser markers, measuring instruments, and digital microscope.

They offer a full array of service support and closely work with customers to guarantee full functionality and operation of the equipment. Their technical staff and sales teams add value to the company by cooperating with its buyers.

They have been consistently ranked as the top 10 best companies in Japan and boast an eye-popping 50% operating margin.

They are headquartered in Osaka, Japan and make up 7.54% of the BOTZ ETF.

To visit their website please click here.

(BOTZ) does have some pros and cons. The best AI plays are either still private at the venture capital level or have already been taken over by giant firms like NVIDIA.

You also need to have a pretty broad definition of AI to bring together enough companies to make up a decent ETF.

However, it does get you a cheap entry into many of the illiquid foreign names in this fund.

Automation is one of the reasons why this is turning into the deflationary century and I recommend all readers who don’t have their own robotic-led business pick up some Global X Robotics & Artificial Intelligence ETF (BOTZ).

And by the way, the entry point right here on the charts is almost perfect.

To learn more about (BOTZ), please visit their website by clicking here.

 

 

 

 

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.