Global Market Comments
April 9, 2020
Fiat Lux
Featured Trade:
(TEN LONG TERM LEAPS TO BUY AT THE BOTTOM)
(MSFT), (AAPL), (GOOGL), (QCOM), (AMZN),
(V), (AXP), (NVDA), (DIS), (TGT)
Global Market Comments
April 9, 2020
Fiat Lux
Featured Trade:
(TEN LONG TERM LEAPS TO BUY AT THE BOTTOM)
(MSFT), (AAPL), (GOOGL), (QCOM), (AMZN),
(V), (AXP), (NVDA), (DIS), (TGT)
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now, and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allows plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.
That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright. I expect the list below to rise by 50% or more over the next two years.
Enjoy.
Microsoft (MSFT) - March 18 2022 $180-$190 bull call spread at $2.67 delivers a 274% gain with the stock at $190, up 16% from the current level. As the global move online vastly accelerates the world is clamoring for more computers and laptops, 90% of which run Microsoft’s Windows operating system. The company’s new cloud present with Azure will also be a big beneficiary.
Apple (AAPL) – June 17 2022 $210-$220 bull call spread at $6.47 delivers a 55% gain with the stock at $226, up 14% from the current level. With most of the world’s Apple stores now closed, sales are cratering. That will translate into an explosion of new sales in the second half when they reopen. The company’s online services business is also exploding.
Alphabet (GOOGL) – January 21 2022 $1,500-$1,520 bull call spread at $7.80 delivers a 28% gain with the stock at $226, up 14% from the current level. Global online searches are up 30% to 300%, depending on the country. While advertising revenues are flagging now, they will come roaring back
QUALCOMM (QCOM) – January 21 2022 $90-$95 bull call spread at $1.55 delivers a 222% gain with the stock at $95, up 23% from the current level. We are on the cusp of a global 5G rollout and almost every cell phone in the world is going to have to use one of QUALCOMM’s proprietary chips.
Amazon (AMZN) – January 21 2022 $2,100-$2,150 bull call spread at $17.92 delivers a 179% gain with the stock at $2,150, up 15% from the current level. If you thought Amazon was taking over the world before, they have just been given a turbocharger. Much of the new online business is never going back to brick and mortar.
Visa (V) – June 17 2022 $205-$215 bull call spread at $3.75 delivers a 166% gain with the stock at $215, up 16% from the current level. Sales are down for the short term but will benefit enormously from the mass online migration of new business only. They are one of a monopoly of three.
American Express (AXP) – June 17 2022 $130-$135 bull call spread at $1.87 delivers a 167% gain with the stock at $135, up 28% from the current level. This is another one of the three credit card processors in the monopoly, except they get to charge much higher fees.
NVIDIA (NVDA) – September 16 2022 $290-$310 bull call spread at $6.90 delivers a 189% gain with the stock at $310, up 19% from the current level. They are the world’s leader in graphics card design and manufacturing used on high-end PCs, artificial intelligence, and gaining. They befit from the soaring demand for new computers and the coming shortage of chips everywhere.
Walt Disney (DIS) – January 21 2022 $140-$150 bull call spread at $2.55 delivers a 55% gain with the stock at $116, up 31% from the current level. How would you like to be in the theme park, hotel, and cruise line business right now? It’s in the price. Its growing Disney Plus streaming service will make (DIS) the next Netflix.
Target (TGT) – June 17 2022 $125-$130 bull call spread at $1.40 delivers a 257% gain with the stock at $130, up 16% from the current level. Some store sales are up 50% month on month and lines are running around the block. Their recent online growth is also saving their bacon.
It will be inevitable – the 5G shift in 2020 will be delayed.
Last year, 5G was available on only about 1% of phones sold in 2019 and demand has cratered this year because of exogenous variables.
Up to just recently, Apple (AAPL) was the bellwether of the success of tech with wildly appreciating shares due to the expected ramp-up to a new 5G phone later this year.
Well, things are more complicated now.
I will be the first one to say it - the new Apple 5G iPhone will be delayed until 2021 – the project has been thrown into doubt because of a demand drop off and headaches with the supply chain in China.
The phenomenon of 5G cannot blossom until consumers can upgrade to 5G devices.
Concerning all the media print of China Inc. going back to work, don’t believe a word of it.
People of the Middle Kingdom are sitting at home just like you and me by navigating around top-down government edicts.
Instead of the perilous commute in a country of 1.4 billion people, Chinese workers are fabricating attendance figures per my sources.
Overall data is grim - global smartphone shipments dropped 38% year-over-year during February from 99.2 million devices to 61.8 million - the largest fall ever in the history of the smartphone market and that is just the tip of the iceberg.
The new data point underscores the magnitude of how the coronavirus is sucking the vitality out of the tech ecosystem in China and thus the end market for global consumer electronics.
The statistic also foreshadows imminent trouble in the smartphone market as other regions have now shut down not only in China but the manufacturing hubs of South East Asia.
The outbreak squeezes both supply and demand.
Factories in Asia are unable to manufacture phones as usual because of obligatory government shutdowns and complexities securing critical components from the supply chain.
5G has been hyped up as the great leap forward for wireless technology that will usher in unprecedented new use cases supercharging global GDP — from driverless transport to robotic automation to smart football stadiums.
And coronavirus is just that Godzilla destroying 5G momentum down.
Mass quarantines, social distancing, remote work, and schooling have been instituted in American cities, meaning that the current network carriers are swamped and overloaded with a surge in data usage.
The Verizon’s (VZ) and the AT&T (T) Broadbands of America are currently focused on maintaining their current core customers, adding extra broadband to handle the increased load, and making sure the health of the network stays intact.
This is a poor climate to upsell products to beleaguered Americans who have just lost income and possibly their house because they cannot pay mortgages.
Services such as YouTube and Netflix (NFLX) have even decreased the quality of streaming on their platforms to handle the dramatic spike in extra usage in Europe with the whole continent locked down.
The Chinese consumer was the Darkhorse catalyst to ramp up the global economic expansion during the last economic crisis, picking up world spending in 2009.
On the contrary, this group of super spenders is less inclined to save the global economy this time around because they are saddled with domestic debt.
Just as unhelpful to Silicon Valley revenues, the technology relationship at the top of the governments are poised to worsen because of the health scare.
The U.S. administration has already banned the use of Chinese components in the U.S. 5G network amid suspicions the devices would be used for espionage.
Back stateside, I believe the U.S. telecoms will explicitly detail a sudden slowdown in the 5G network rollout during their next earnings report.
The telecom companies have been able to successfully handle the extra incremental load, but it has had to allocate resources to service the extra volume.
In the meantime, companies will shift to doing infrastructure and site preparation in anticipation of the re-build up to 5G, but that could be next to be put on ice if crisis management moves to the forefront.
Considering every 5G base station is being manufactured in Asia, one must be naïve in believing all is well and they will probably need to do what the 2020 Tokyo Olympics will shortly do – postpone it.
It’s not business as usual anymore.
This time it’s different.
The world just isn’t ready to digest such a shift in global business as 5G until the fallout of the coronavirus is in the rear-view mirror.
The 5G phenomenon underlying effect is to supercharge globalization into smaller networks of interconnectivity and that is not possible during a black swan event like the coronavirus which is the antithesis of globalization and interconnected business.
Just take the situation across the Atlantic Ocean in Europe, UBS Group AG, and Credit Suisse Group AG required clients to post additional collateral, and money managers in New York are preparing term sheets for ultra-rich Americans to urgently meet margin calls.
Many people are scurrying back to their doomsday’s shelter and that does not scream global business.
If you thought gold was the safe haven – wrong again – it experienced back-to-back weekly losses as margin pressures force fire sales of gold to raise cash.
Another glaring example are the assets of Eldorado Resorts Inc., controlled by the founding Carano family, which burned $28.7 million of stock in the casino entity to meet a margin call to satisfy a bank loan.
Things are that bad now!
Sure, telecom players might argue that a sudden influx of workers from home necessitates more investment in 5G, but if they have no income, all bets are off.
The capacity of 4G home broadband has proved it is good enough for today’s demands and it means the last stage of 4G will be a high data consumption longer phase before business lethargically pivots to 5G in 2021.
Verizon’s CEO Hans Vestberg said last year that half the U.S. will have access to 5G by the end of 2020, and I will say that is now impossible.
This sets up a generational buy in the Silicon Valley chip names involved in 5G after coronavirus troubles peak such as Nvdia (NVDA), Xilinx (XLNX), Qorvo (QRVO), and QUALCOMM Incorporated (QCOM).
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 11 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What is the worst-case scenario for this bear market?
A: The average earnings loss for a recession is 13%. Last year, we earned $165 a share for the S&P 500. So, a recession would take us down to $143 a share. Multiply that by the 15.5X hundred-year average earnings multiple, where we are now, and that would take the (SPX) down to 2,200. However, if we get 100 million cases and 5 million deaths, as some scientists are predicting, we could get a 2008 repeat and a 50% crash in the (SPX) to 1,700. With the administration asleep at the switch, that is clearly a possibility. Nice knowing you all.
Q: Do you think we’re still setting up for another roaring 20s?
A: Yes, absolutely. We could not have a roaring 20s unless we got a major selloff and clearing out of old positions like we're getting now. That flushes out all the old capital and positions and paves the way for people to set up brand new positions at really bargain prices. If you missed the 2009 bottom, here's another chance.
Q: Will the fiscal stimulus help defeat the coronavirus?
A: No, viruses are immune to money. They don’t take PayPal or American Express (AXP). The president has been able to buy his way out of all his other problems until now; there’s no way to buy his way out of this one.
Q: Is JP Morgan’s (JPM) Jamie Dimon getting a heart attack related to the financial crisis?
A: Probably, yes. In a normal time, the pressure of a CEO in these big banks is enormous. All of a sudden half of your small customers are looking at bankruptcy—the pressure has to be immense. You've got customers screaming for short term loan facilities, you’ve got risk managers asking for margin extensions. And you certainly don't want to buy the banks here. I think this may be the final selloff with legacy banks, from which they never recover. The banks will disappear and come back online.
Q: What would you do with a $45,000-dollar portfolio right now? I don’t do options.
A: Look at my story on Ten Leaps to Buy at Market Bottom. Use those names—Microsoft (MSFT), Apple (AAPL), NVIDIA (NVDA), etc.—and just buy the stocks. Buy half now and a half in a month. This is a time to dollar cost average. And you’re looking at doubles at a minimum 3 years down the road—at the end of this year if you’re lucky. Once the virus burns out, it will only take a couple months to do that. Then it will be off to the races once again.
Q: Since the 2018 low was never tested, what do you think of 2400/2450?
A: I think that’s great. And you can get a half dozen different analyses that all come up with numbers around 2400, 2500, 2600. That’s where the final low will be—where you get a convergence of multiple support lines and opinions.
Q: Will buybacks come back or are they over for now?
A: They will come back once markets bottom. Companies aren’t stupid; they don’t like buying their own stocks at all-time highs, but they certainly will come in with major amounts of buying when they see their stocks down 20% or 30%. That's certainly what Apple is going to do.
Q: Will luxury retail shares get killed in the current market?
A: Yes, especially stocks like (LVMH), the old Louis Vuitton Moet Hennessey. They’re already down 37% this year. When it becomes clear that we are in an actual recession, these luxury names across the board will get completely abandoned. By the way, I worked with the son of the founder of this company when I was at Morgan Stanley. We called him “Bubbles.”
Q: Are there any similarities to 2008?
A: Yes; it’s worse because the market is dropping much faster than it ever has before. The 52% selloff in 2008 was spread out over the course of 18 months. Here, it’s taken only 14 trading days to see half of the damage done back then. It’s truly unbelievable.
Q: What do you think about gold (GLD)?
A: Even though gold is going up, gold miners (GDX) are doing terribly because they are stocks. They get tarred with the same brush blackening all other stocks. This is exactly what happened during the 2008-2009 crash. Fundamentals go out the window in these kinds of trading conditions, but they always come back.
Q: Is Europe in recession?
A: Absolutely, yes. I saw an interview with the Adidas CEO (ADDYY) this morning on TV and they said sales are off 90% on a month-on-month basis. Their stock is down 49% this year. You can bet that every other consumer company in Europe is suffering similar declines.
Q: What will real estate do in the next 3 months?
A: It's impossible to price real estate so finely because it's so illiquid. However, I expect it to hold up here because of super low interest rates, and then keep rising over the long term. We’re not going to get anything like the crashes we saw in 2008-2009 because all the excess leverage is not in the real estate market now, it’s in the stock market, where we are getting a much-deserved crash. If anything, I’d be buying rental properties here in low cost cities.
Q: What if the Dow Average (INDU) reaches the 300-day moving average?
A: It’s a nice theory, but technicals are meaningless in the face of panic selling. You don't want to get too fancy looking at these charts. When you have a billion shares to go at market, the 200 or 300 day moving average means nothing.
Good Luck and Good Trading. And stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 26 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: There’s been a moderation of new coronavirus cases in China. Is this what the market needs to find a bottom?
A: Absolutely it is; of course, the next risk is that cases keep increasing overseas. The final bottom will come when overseas cases start to disappear, and that could be a month or two off.
Q: How low will interest rates go after the coronavirus?
A: Well, interest rates already hit new all-time lows before the virus became a stock market problem. The virus is just giving it a turbocharger. Our initial target of 1.32% for the ten-year US Treasury bond was surpassed yesterday, and we think it could eventually hit 1.00% this year.
Q: What is the best way to know when to buy the dip?
A: When the Volatility Index (VIX) starts to drop. If you can get the volatility index down to the mid-teens and stay there, then the market will stabilize and start to rise fairly sharply. A lot of the really high-quality stocks in the market, like United Airlines (UAL), Walt Disney (DIS), Apple (AAPL) and Amazon (AMZN), have really been crushed by this selloff. So those are the names people are going to look at for quality at a discount. That’s going to be your new investment theme, buying quality at a discount.
Q: Do recent events mean that Boeing (BA) is headed down to 200?
A: I wouldn't say $200, but $280 is certainly doable. And if you get to $280, then the $240/$250 call spread all of a sudden looks incredibly attractive.
Q: What does a Bernie Sanders presidency mean for the market?
A: Well, if he became president, we could be looking at like a 50-80% selloff—at least a repeat of the ‘09 crash. However, I doubt he will get elected, or if elected, he won’t have control of congress, so nothing substantial will get done.
Q: Is this the beginning of Chinese (FXI) bank failures that will cause an economic crisis in mainland China?
A: It could be, but the actual fact is that the Chinese government is doing everything they can to rescue troubled banks and companies of all types with short term emergency loans. It’s part of their QE emergency rescue package.
Q: Can you explain what lower energy prices mean for the global economy?
A: Well, if you’re an oil consumer (USO), it’s fantastic news because the price of gas is going down. If you’re an oil producer (XLE), like for people in the Middle East, Texas, Louisiana, Oklahoma, and North Dakota, it’s terrible news. And if you’re involved anywhere in the oil industry, or own energy stocks or MLPs, you’re looking at something like another great recession. I have been hugely negative on energy for years. I’ve seen telling people to sell short coal (KOL). It’s having a “going out of business” sale.
Q: Should I aggressively short Tesla (TSLA) here? Surely, they couldn’t go up anymore.
A: Actually, they could go up a lot more. I would just stay away from Tesla and watch in amazement—there’s no play here, long or short. It suffices to say that Tesla stock has generated the biggest short-selling losses in market history. I think we’re up to about $15 billion now in short losses. Much smarter people than us have lost fortunes trying in that game.
Q: Was that an Amazon trade or a Google trade?
A: I sent out both Amazon and an Apple trade alert this morning. You should have separate trade alerts for each one.
Q: Are chips a long term buy at today’s level?
A: Yes, but companies like NVIDIA (NVDA), Micron Technology (MU), and Advanced Micro Devices (AMD) may be better long-term buys if you wait a couple of weeks and we test the new lows that we’ve been talking about. Chips are the canary in the coal mine for the global economy, and we have not gotten an all-clear on the sector yet. If you’re really anxious to get into the sector, buy a half of a position here and another half 10% down, which might be later this week.
Q: When will Foxconn reopen, the big iPhone factory in China?
A: Probably in the next week or so. Workers are steadily moving back; some factories are saying they have anywhere from 60-80% of workers returning, so that’s positive news.
Q: Are bank stocks a sell because of lower interest rates?
A: Yes, absolutely. If you think the 10-year treasury is running to a 1.00% yield as I do, the banks will get absolutely slaughtered, and we hate the sector anyway on a long-term basis.
Q: What about future Fed rate cuts?
A: Futures markets are now pricing in possibly three more rate cuts this year after discounting no more rate cuts only a few weeks ago. So yes, we could get more interest rates. I think the government is going to pull all the stops out here to head off a corona-induced recession.
Q: Once your options expire, is it still affected by after-hours trading?
A: If you read the fine print on an options contract, they don’t actually expire until midnight on a Saturday night after options expiration day, even though the stock market stops trading on a Friday. I’ve never heard of a Saturday exercise, but you may have to get a batch of lawyers involved if you ever try that.
Q: What’s the worst-case scenario for this correction?
A: Everything goes down to their 200-day moving averages, including Indexes and individual stocks. You’re talking about Apple dropping to $243 and Microsoft (MSFT) to $144, and NASDAQ (QQQ) to 8,387. That could tale the Dow Average (INDU) to maybe 24,000, giving up all the 2019 gains.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
December 13, 2019
Fiat Lux
Featured Trade:
(TUESDAY, FEBRUARY 4 SYDNEY, AUSTRALIA STRATEGY LUNCHEON)
(BIDDING MORE FOR THE STARS),
(SPY), (INDU), (NVDA)
(NOW THE FAT LEADY IS REALLY SINGING FOR THE BOND MARKET),
(TLT), (TBT)
First, what is augmented reality for all the newbies?
Augmented reality is an interactive experience of a real-world environment where the objects that reside in the real world are enhanced by computer-generated perceptual information, sometimes across multiple sensory modalities.
Augmented reality (AR) went rival in 2016 when the Pokemon Go mania captivated everyone from children to adults.
No sooner than 2021, the AR addressable market is poised to mushroom to $83 billion - a sizeable increase from the $350 million in 2018.
Much like machine learning, corporations are learning to marry up this technology with their existing products supercharging the performance.
Ulta Beauty, for example, has acquired AR and artificial intelligence start-ups to help customers digitally test the final appearance of makeup before users purchase the product.
That is just one micro example of what can and will be achieved.
Looking deeper into the guts, Qualcomm (QCOM) is hellbent on making their chips a critical part of the puzzle.
The company is better known for a telecom and a semiconductor play, not often lumped in with a list of AR stocks.
Qualcomm is strategically positioned to capitalize on the integration of augmented reality in mainstream corporate business embedding their chips into the devices.
Maximizing Qualcomm’s future role in the industry, the company announced in 2018 that it would be developing a chipset specifically for AR and VR applications.
This broad-based solution will make it easier for other developers to bring new glasses to the marketplace.
Autodesk (ADSK) is one of my favorite software stocks and a best of breed of industry design.
They sell 3D rendering software to designers and creators by offering a platform in which they can transform 2D designs into digital models that are both interactive and immersive, creating compelling experiences for end-users.
Autodesk has an array of powerful software suites to augment virtually any application, such as 3ds Max, a 3D modeling program; Maya LT game development software; its automotive modeling program VRED; and Forge, a development platform for cloud-based design.
Facebook (FB) has been piling capital into AR for years.
CEO Mark Zuckerberg wants to create an alternative profit-driver and is desperate to wean his brainchild from the digital ad circus.
One example is Facebook’s Portal TV and its Spark AR which is the platform responsible for mobile augmented reality experiences on Facebook, Messenger, and Instagram.
It supplies the virtual effects for consumers to play around with, but it is yet to be seen if consumers gravitate towards this product.
Lumentum (LITE) is the leader in 3D-sensing markets developing cloud and 5G wireless network deployments.
They manufacture 3D sensor lasers that can be used with smartphones to turn handsets into a sort of radar. Sensors are clearly a huge input in how AR functions along with the chips.
CEO of Apple (AAPL) Tim Cook put it best when he earlier said, “I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you.”
He said that in 2016 and AR has yet to mushroom into the game-changing sector initially thought partly because the roll-out of 5G is taking longer than first expected.
Apple consumers will need to then adopt a 5G device or phone to really get the AR party started and that won’t happen until the backend of next year.
My initial channel checks hint that the Cupertino firm is planning a 5.4-inch model, two 6.1-inch devices, and one 6.7-inch phone, all of which will support 5G connectivity.
I surmise that Apple’s two premium devices will feature “world-facing” 3D sensing, a technology that could help Apple boost its augmented-reality capabilities and support other feature improvements on its priciest devices.
Apple has had a big hand in Lumentum's growth and will continue to buy their sensors, but other key component suppliers will get contracts such as Finisar, a manufacturer of optical communication components and subsystems.
Apple planned to debut AR glasses by 2020, but the rollout is now delayed until 2022.
They are clearly on the back foot with Microsoft (MSFT) further along in the process.
Microsoft already has a second iteration of its AR headset, HoloLens, and is compatible with several apps and has integration with Azure as well.
The head start of 2 years could really make a meaningful impact and might be hard for Apple to recover.
Facebook isn’t the only social media company going full steam into AR, Snap (SNAP) recently unveiled its newest spectacles, which feature AR elements.
Another application of AR is autonomous driving with Nvidia working on improving the driving experience by fusing AR with artificial intelligence.
Nvidia (NVDA) is already thinking about the next generation of AR technologies with varifocal displays, which improve the clarity of an object for a user.
It will take time to transform our relationship with AR, the infrastructure is still getting built out and many people just don’t have a device that will allow us to tap into the technology.
Investors must know that AR-related stocks will start to appreciate from the anticipation of full sale adoption and there could be a killer app that forces the mainstream user to take notice.
Until then, companies jockey for position and hope to be the ones that take the lion’s share of the revenue once the technology goes into overdrive.
Global Market Comments
October 1, 2019
Fiat Lux
Featured Trade:
(LAUNCHING THE NEW MAD HEDGE BIOTECH AND HEALTHCARE LETTER)
(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)
Global Market Comments
September 10, 2019
Fiat Lux
SPECIAL ARTIFICIAL INTELLIGENCE ISSUE
Featured Trade:
(NEW PLAYS IN ARTIFICIAL INTELLIGENCE),
(NVDA), (AMD), (ADI), (AMAT), (AVGO), (CRUS),
(CY), (INTC), (LRCX), (MU), (TSM)
It’s been three years since I published my first Special Report on artificial intelligence and urged readers to buy the processor maker NVIDIA (NVDA) at $68.80.
The stock quadrupled, readers are understandably asking me for my next act in the sector.
The good news is that I have one.
For a start, you could go out and buy NVIDIA again.
With an explosive 50% annual earnings growth, a near-monopoly in super fast processors, and a huge lead over the competition, I think there is another double in the shares that could take the price up to a stratospheric $300. Its newest super-fast graphics card, the Turing, promises to be a real barn burner and dominate the industry yet again.
But I can do better than that.
The good news if you are new to this sector is that the entire AI space has started to broaden out to offer a host of investment opportunities beyond the tiny handful I first mentioned in 2016.
These include legacy chipmakers, survivors of the great Dotcom bust, whose shares have barely moved in years.
Yes, there is such a thing as a cheap AI stock. To find out who they are, read on.
The reason for the expansion of the AI sector is that practically overnight these ultra-sophisticated algorithms have become essential to any company that wants to survive in online commerce or stay in business….period.
Those of us who have been in this business for more than 15 minutes have seen this pattern before, and the resulting impact on share prices: the Boeing 707, the personal computer, Windows, the Internet, and the smart cell phone.
AI is everywhere.
In the old days, visiting a website and window-shopping their products was easy. You just clicked around a few times and then moved on to the next site.
Now if you click on a product once, that site will follow you around relentlessly for months, appearing in the margins of your emails, offering you endless discounts and special deals.
I bought a Dell computer six months ago, and it is still pounding away at me with better offers. I feel like such a dummy buying a machine at the first price asked.
That is all AI.
The auto industry is now a major growth industry for AI. Even a simple garden-variety vehicle needs 100 chips just to operate.
The gull-wing doors on my new Tesla Model X each has its own learning program. They never open the same way twice.
In fact, when I first picked up the car last year, the salesman warned by saying it would be “stupid” for the first 3,000 miles.
It had to “learn” how to drive before I let it attempt any sophisticated self-driving maneuvers, like backing into a parking space on a crowded street.
I let it park itself in my garage now. I have only had a heart attack once.
With US annual auto production at 16.7 million units annualized, and global car and commercial vehicle production at a record 94.64 million, that is a lot of processors.
I have been covering Silicon Valley since it was a verdant, sun-kissed peach orchard in Northern California.
I have to say that in the half-century that I have followed the technology industry, I have never seen the principals, gurus, and visionaries so excited about a major new trend like AI.
Asking if AI is relevant now is like pondering the future of Thomas Edison’s new electricity invention in 1890.
If you think that AI still belongs in the realm of science fiction, you obviously didn’t get the memo. It is all around us all the time, 24/7. You just don’t know it yet.
And here’s the rub.
It is impossible to invest purely in AI.
All-new AI startups comprise small teams of experts from private labs and universities financed by big venture capital firms like Sequoia Capital, Kleiner Perkins, and Andreeson Horowitz.
After developing software for a year or two, they are sold on to major technology firms at huge premiums. They never see the light of day in the form of a public listing.
Alphabet (GOOGL) acquired Britain-based Deep Mind in 2014. Later that year, Google’s AlphaGo program defeated the world’s top-ranked Go player.
In 2016, Microsoft (MSFT) purchased Equivio, a small firm that applies AI to advanced document searches on the Internet.
Amazon (AMZN) recently bought out Orbeus, a startup known for machine learning tools for image recognition.
Amazon’s Jeff Bezos now says that his Amazon Fresh home food delivery service is using AI to grade strawberries.
Really!
We’re not talking small potatoes here.
The global artificial intelligence market is expected to grow at an annual rate of 44.3% a year to $23.5 billion by 2025.
Nearly half of all applications now use some form of AI that by 2020 will earn businesses an extra $60 billion a year in profits.
And from what I have learned from speaking to the major players over the last few weeks, I am convinced that these are low numbers by an order of magnitude.
I have been following developments in artificial intelligence since the 1960s.
There were those feeble computer dating attempts in the early seventies where we all had to prepare IBM punch cards.
I was matched with an annoyingly aggressive bleach blonde real estate agent. (Really?). Her only real qualification was that she was female.
It took decades and tens of thousands of programming man-hours before IBM’s Deep Blue could become a chess grandmaster in 1996, defeating Gary Kasparov.
Big Blue’s latest effort came to us with Watson in 2007, an 85,000-watt behemoth with 90 servers and 15 terabytes of data, or three quarters of the content of the entire Library of Congress.
The machine can read a staggering 1 million books a second. IBM has so far poured $15 billion into the project.
In 2011, Watson defeated the top-rated Jeopardy game show contestant by answering the question “What city’s national museum lost the “Lion of Nimrod.” The answer was “What is Baghdad” (I knew that!).
Today, Watson is on loan to the University of North Carolina at Chapel Hill where it has been deployed to cure cancer.
It took scientists a week to teach Watson how to read medical literature. In the second week, it read every paper published on cancer, some 25 million.
By the third week, it was proposing customized cures for advanced cancer patients, which achieved a 33% success rate.
After all, it can read all of the 8,000 cancer papers that are published every day from around the world IN SECONDS!
Scientists say that Watson has so far reached only 1% of its true potential.
It gets better than that.
A clinic can now biopsy your tumor, sequence its DNA, design a custom protein that will target and destroy your personal tumor, mass-produce it, inject it in your tumor, and cure you of cancer in a month.
This is being done with human volunteers in clinical trials NOW.
Expect this procedure to go retail and be made available to you in about five years. And by that, I mean cheap, locally available, and covered by your health insurance policy.
I believe that Watson and its future offspring will cure the major human maladies within a decade. My generation will probably be the last to suffer serious disease.
It isn’t just Watson that will take us the great leap forward in computing. By 2020, you will be able to buy a low-end laptop for $500 that can hold ALL KNOWLEDGE ACCUMULATED IN HUMAN HISTORY!
They better hurry. That body of knowledge is doubling every 18 months!
It is a key part of my argument that the US will enjoy a Golden Age and see a return of the “Roaring Twenties” during the 2020s.
If you have in any way been involved in the stock market for the past five years, AI has invaded your life.
High frequency trading and hedge funds now account for 70% of the daily trading volume on the major stock exchanges, and almost all of this is AI-driven.
Having spent my entire life trading stocks, I can confirm that in recent years the market’s character has dramatically changed, and not for the better. Call it trading untouched by human hands.
Algorithms are trading against algorithms, and whoever wins the nuclear arms race brings home the big bucks.
You used to need degrees in Finance and Economics, or perhaps an MBA, to become a professional fund manager. Now it’s a Ph.D. in Computer Science.
Remember the May 2010 flash crash when the Dow Average plunged 1,100 points in minutes wiping out $4.1 billion in equity value? AI’s fingerprints were all over that.
In 2016, the British pound lost 6% of its value in a mere two minutes, a move unprecedented in the history of foreign exchange markets. The culprit was AI.
Don’t expect the path forward to AI to be an easy one.
Indeed, the machines already have the power of life and death over all of us.
No less figures than Nobel Prize winner Dr. Stephen Hawking and Tesla’s Elon Musk have warned that computers and the Internet may have the power to pose a threat to human existence within a decade.
They are especially concerned about the militarization of powerful robots, something I know the US Defense Department is hell-bent on developing.
As I write this, the only thing preventing a drone attacking a village in Afghanistan is an Army corporal hitting a red button on a console in Nevada.
In the future, antivirus software won’t be needed to protect your computer. It will be essential to protect you FROM your computer.
You know that massive denial of service attack that hit the United States on October 21, 2016?
I asked one of my friends at security giant Palo Alto Networks (PANW) if it was the Russians again. He replied, “You better hope it’s the Russians.”
The implication is that the Internet may have launched the attack itself.
Now, about that stock recommendation.
Since we aren’t venture capitalists, we can’t buy into pure AI firms in their early stages. And I’m too old to get a Ph.D. in computer science.
We, therefore, have to be sneaky and get in through the back door via an indirect play which still has plenty of upside leverage.
My current favorite among the AI alternative stocks is Advanced Micro Devices (AMD).
If Intel only piques your appetite for AI stocks and you feel you need another serving, I have listed below ten names that will benefit mightily from this once-a-century opportunity.
AI Stock to BUY
Advanced Micro Devices (AMD)
Analogue Devices Communication (ADI)
Applied Materials (AMAT)
Broadcom (AVGO)
Cirrus Logic (CRUS)
Cypress Semiconductor (CY)
Intel (INTC)
Lam Research (LRCX)
Micron Technology (MU)
Taiwan Semiconductor (TSM)
If you’re really lazy, you can just buy a basket of semiconductor stocks through an industry-specific ETF.
The largest is the VanEck Vectors Semiconductor ETF (SMH), with $1.3 billion in assets under management. For a prospectus on the fund, please click here.
Or you could just stick with NVIDIA.
No matter how you want to slice and dice it, AI should be a dominant factor in your IRA, 401k, or benefit plan.
And you are a trader by nature, this will be a great sector to trade around.
As for your computer, you better start leaving it unplugged at night.
You never know.
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