Visa and Mastercard’s card networks are a relic of the past, not in terms of reach or footprint, but the technology of it.
This will cost their stock price and we are already seeing it play out in the market.
The canary in the coal mine was fintech players Square (SQ) and PayPal (PYPL) whose share prices were pummeled at the back end of last year.
PYPL is down 40% from its 2021 peak and SQ experienced a similar 42% drop.
This fierce competition and the crowded marketplace have investors paying less of a premium than ever before.
In a tightening rate environment, it’s clear the wolves are out for more flesh and the contagion will spread to those further up the food chain.
Fintech business models aren’t as robust or foundational as the bulwarks of MA and V, but questions must be asked if small businesses aren’t willing to pay an extra 2% on sales for outdated technology.
The fintech space has moved a long way in a short amount of time causing investors to be concerned about secular growth sustainability.
Among them are concerns that consumers are shifting to debit, away from higher-margin credit cards.
Consumers are also using more alternative payment methods that may bypass the card networks, including “buy now pay later” services offered by companies like Klarna, Afterpay (AFTPY), and Affirm (AFRM).
Visa has also come under pressure from a recent announcement by Amazon.com (AMZN) that next year it will stop accepting Visa-branded credit cards issued in the United Kingdom and this could be the beginning of a narrowing of Visas’ moat that could trigger a domino effect in other rich western countries.
The bulls would say that the stocks could undergo a reversal if the Omicron variant is not as bad as initially thought creating a tsunami of consumer spending massaging the bottom line for Visa and Mastercard.
But it’s looking more like V and MA are the victims of tightening travel restrictions around the globe and elevated positive cases that are immobilizing consumers.
The big card networks rely heavily on revenues related to cross-border travel as consumers and businesses use their cards for airfare, Airbnb’s, and Ubers, as well as duty-free gifts in foreign countries.
Multiples may need to come down if the Omicron variant puts the shackles on travel as countries reimpose bans or quarantine rules.
Investors had been counting on a recovery in cross-border travel to boost revenues for the card networks. This is definitely a kick in the nuts after initially seeing momentum as countries in general trended to loosening restrictions.
International transactions brought in $1.9 billion, or 21%, of Visa’s $8.9 billion in revenues for the 2021 fourth quarter.
The segment is highly profitable due to steep transaction and foreign-exchange fees. Cross-border margins come in around 69%, contributing significantly to Visa’s overall earnings per share.
The Christmas season has been confronted by a bevy of new restrictions as many places consider other measures to curb the spread of the Omicron variant.
Ultimately, even if MA and V can get positive reinforcement from increased short-term travel which seems unlikely, alternative business models are breathing down their neck as the technology of money has advanced.
The “buy now, pay later” phenomenon, although risky, is a rapid gut punch to the incumbents.
Then consider there is speculative technology like Bitcoin out there that bypasses these dinosaur networks altogether.
I believe 2022 is the year that MA and V get exposed as a luxury in a frugal world where small businesses can’t afford to give away 2% of revenue.
There’s too much money being invested into the technology of money for small businesses to reach for MA and V’s network.
Even open banking and digital networks can really dent the traditional payment networks.
Basically, I believe these companies have hit the high-water mark, and the likes of Zelle and Venmo will start to put pressure on these high fees.
Places like China don’t even use them by bypassing them through digital wallets like Wechat pay and Alipay.
Pie shrinkage and revenue decelerate — I believe this is one of the seminal trends we will see in fintech in 2022.
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Automation is taking place at warp speed displacing employees from all walks of life.
According to a recent report, the U.S. financial industry will depose of 200,000 workers in the next decade because of automating efficiencies.
Yes, humans are going the way of the dodo bird and banking will effectively become algorithms working for a handful of executives and engineers.
The x-factor in this equation is the direct capital of $150 billion annually that banks spend on technological development in-house which is higher than any other industry.
Welcome to the world of lower cost, shedding wage bills, and boosting performance rates.
We forget to realize that employee compensation eats up 50% of bank expenses.
The 200,000 job trimmings would result in 10% of the U.S. bank jobs getting axed.
The hyped-up “golden age of banking” should deliver extraordinary savings and premium services to the customer at no extra cost.
This iteration of mobile and online banking has delivered functionality that no generation of customers has ever seen.
The most gutted part of banking jobs will naturally occur in the call centers because they are the low-hanging fruit for the automated chatbots.
A few years ago, chatbots were suboptimal, even spewing out arbitrary profanity, but they have slowly crawled up in performance metrics to the point where some customers are unaware they are communicating with an artificially engineered algorithm.
The wholesale integration of automating the back-office staff isn’t the end of it, the front office will experience a 30% drop in numbers sullying the predated ideology that front office staff are irreplaceable heavy hitters.
Front-office staff has already felt the brunt of downsizing with purges carried out from 2018 representing an eighth year of continuous decline.
Front-office traders and brokers are being replaced by software engineers as banks follow the wider trend of every company transitioning into a tech company.
The infusion of artificial intelligence will lower mortgage processing costs by 30% and the accumulation of hordes of data will advance the marketing effort into a smart, multi-pronged, hybrid cloud-based and hyper-targeted strategy.
The last two human bank hiring waves are a distant memory.
The most recent spike came in the 7 years after the dot com crash of 2001 until the sub-prime crisis of 2008 adding around half a million jobs on top of the 1.5 million that existed then.
After the subsidies wear off from the pandemic, I do believe that the banking sector will quietly put in the call to trim even more.
The longest and most dramatic rise in human bankers was from 1935 to 1985, a 50-year boom that delivered over 1.2 million bankers to the U.S. workforce.
This type of human hiring will likely never be seen again in the U.S. financial industry.
Recomposing banks through automation is crucial to surviving as fintech companies like PayPal and Square are chomping at the bit and even tech companies like Amazon and Apple have started tinkering with new financial products.
And if you thought that this phenomenon was limited to the U.S., think again, Europe is by far the biggest culprit by already laying off 63,036 employees in 2019, more than 10x higher the number of U.S. financial job losses and that has continued in 2020 and 2021.
In a sign of the times, the European outlook has turned demonstrably negative with Deutsche Bank announcing layoffs of 40,000 employees through 2023 as it scales down its investment banking business.
Germany banks are also passing on the burden of negative interest rates to their clients.
A recent survey by Deutsche Bundesbank shows that 58% of banks are charging all savers negative interest rates while others only target wealthy and corporate clients.
If the U.S. dips into negatives rates in the future, expect the same nasty effect on job force cuts that Europe has experienced.
Either way, don’t tell your kid to get into banking, because they will most likely be feeding on scraps at that point.
THE LAST STAGE OF HUMAN-FACING BANK SERVICES IS NOW!
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The fintech trade is tiring — that is what the underperformance of stocks like PayPal (PYPL) and Square (SQ) is telling us.
Jack Dorsey’s Square has retraced around 25% from its peak and is bang on even from where it was 365 days ago.
Not what you want to hear if you’re a fintech trader.
The pullback from PYPL is even more precipitous declining around 40% from its peak.
Certainly, it would be cliché for me to say that the low-hanging fruit is gone from the fintech trade, but that’s exactly what is happening here.
Not only that, but I would also like to point out that most companies without a home-field advantage ecosystem are getting penalized for exactly that — not having an ecosystem.
Wasn’t it weird how the whole tech sector literally gave us a rip-your-face-off selloff the other day yet, Apple was one of the only tech stocks that reacted positively?
As we move into the late stages of the economic cycle, the goalposts are certainly narrowing for the tech companies, and that’s bad news for SQ and PYPL.
Another way to get penalized is to let that moat narrow which is effectively what has happened to PYPL and SQ.
And that’s the thing with PYPL, it’s just a way to pay, and not an ecosystem.
It plays second fiddle to that of wall gardens and the user trapped in it who is spending and can’t find a way out.
Another point I would like to make is that Twitter (TWTR) at these levels is an ideal buy-the-dip candidate precisely because it’s a great walled garden whose potential has yet to be untapped.
And readers shouldn’t let the mismanagement of the company by former CEO Jack Dorsey turn you off from a great long-term investment.
PYPL would kill for a platform like Twitter and instead needs to grovel to other strategic platforms to allow them to use PYPL’s technology.
PYPL is finally exposed, and I guess more accurate would be to say they are getting undercut by stickier technology that is more convenient to the consumer.
And what does that get you in late 2021?
Downgrades and slews of them which cut blocks the stock at its knees.
We just got one from Bernstein the other day and then it almost becomes a self-fulfilling prophecy with other analyst outlets doing the same thing in a copycat league.
Instead of catching a falling knife in SQ and PYPL, traders need to let these stocks breathe and find support where we know buyers will come in to breed confidence in an upward trajectory.
Easier said than done.
What has been all the rage so far denting PYPL and SQ’s model?
Enter Buy Now Pay Later (BNPL).
Naturally, the differentiated mechanism around which this technology revolves around is the delay in paying, which is never a good concept for a fintech player who rather gets paid ASAP.
Delayed payment is one headache, but then the downward force on fees is another monumental concern, if not downright scary.
This will no doubt trounce margin expansion moving forward and evidence of slowed growth in the latest quarter does not portend well for the company, especially as pandemic tailwinds continue to fade.
Another talking point is BNPL’s lack of credit checks meaning the quality of purchasers will naturally decline, may I even say attract fraudsters as well, and the companies will need to build up loss reserves to compensate for a riskier purchaser profile.
Klarna is another major BNPL company, and they were part of this new industry that took in around 20% of all sales on Cyber Monday.
That rather high number bodes poorly for PYPL in the short term.
Reinforcing the strategic hole of a lack of walled garden is that PYPL is desperate to cultivate partnerships like PYPL’s Venmo joining forces with Amazon (AMZN) — Starting next year, you'll be able to use the money anybody Venmo’s you to buy products directly from Amazon — so long as you live in the US.
But again, Amazon is infamous for replacing outside technology with its own in-house solution over time.
PYPL’s counter solution for BNPL is to enter the BNPL lovefest as well which will effectively trigger a race to zero.
Stopgap solutions will inevitably cannibalize its own business model.
Then let’s point to another walled garden — Tim Cook’s Apple with its Apple wallet.
It’s getting better and with the Apple Card, do they ever really need to spend one second considering a partnership with PYPL or SQ.
There is an inquisition going on in the fintech industry and big body blows will need to be landed for some clear-cut solutions that will ultimately lead to consolidation.
In this precarious environment, don’t get too fancy while fintech is getting elbowed out the way, head to higher ground where balance sheets can absorb just about anything.
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Below please find subscribers’ Q&A for the November 3 Mad Hedge Fund Trader Global Strategy Webinar broadcast from the safety of Silicon
Valley.
Q: Have you considered buying Coinbase (COIN)?
A: Yes, we actually recommended it as part of our Bitcoin service in the early days back in July. It’s gone up 62% since then, right along with the Bitcoin move itself. So yeah, buy (COIN) on dips—and there will be dips because it will be at least triple the volatility of the main market. And be sure to dollar cost average.
Q: Do you think the breakout in small caps (IWM) will hold and, if so, should we focus on small-c growth?
A: Yes it will hold, but no I would focus on the big cap barbells, which will lead this rally for the next 6 months. And there you’re talking about the best of tech which is Google (GOOGL) and Microsoft (MSFT), and the best of financials which is Morgan Stanley (MS), Goldman Sachs (GS), and JP Morgan (JPM).
Q: Why not time the webinar for after the FOMC? What will be the market reaction?
A: Well, first of all, we already know what they’re going to say—it’s been heavily leaked in the last week. The market reaction will be initially a potential sharp down move that lasts a few minutes or hours, and then we start a grind up for the next two months. So that's why I wanted to be 80% leverage long going into this. Second, we have broadcast this webinar at the same time for the last 13 years and if we change the time we will lose half our customers.
Q: Why do you always do debit spreads?
A: They’re easier for beginners to understand. That’s the only reason. If you’re sophisticated enough to do a credit spread, the results will be the same but the liquidity will be slightly better, and you can also apply that credit to meet your margin requirements. We have a lot of basic beginners signing up for our service in addition to seasoned pros and I always encourage people to do what they're most comfortable with.
Q: Are you still comfortable with the Morgan Stanley (MS) and Berkshire Hathaway (BRKB) positions?
A: I expect both to go up 10-20% by March, so that’s pretty comfortable. By the way, if you have extremely deep in the money call spreads on Goldman Sachs or Morgan, consider taking profits on those and rolling your strikes up. If you have like the $360-$380 vertical bull call spread in Goldman Sachs, realize that gain and roll up to the $420-$430 March position in Goldman Sachs—that will give you another 100% profit by March. With the $360-$ 380s, you have like 97% of the profit already in the price, there’s no leverage left and no point in continuing, you can only go down.
Q: What should I do with my China position?
A: Sell all your positions in China, realize all the losses now so you can offset those with all the huge profits on all your other positions this year. There I’m talking about Ali Baba (BABA), Baidu (BIDU), and (JD), which have been absolutely hammered anywhere from down 50% to down 70%. And do it now before everyone else does it for the same reasons.
Q: Thoughts on Paypal (PYPL) lately?
A: The stock is out of favor as money is moving out of PayPal into newer fintech stocks. The move down is totally unjustified and screaming long term buy here, but for the short-term investors are going to raid the piggy bank, sell the PayPal, and go into the newer apps. This has been my biggest money-losing trade personally this year because PayPal long-term has a great story.
Q: Will earnings fall off next year due to prior year comparisons or supply chain?
A: No, if anything, earnings are accelerating because supply chain problems mean you can charge customers whatever you want and therefore increase margins, which is why the stock market is going up.
Q: Long term, what would your wrong strikes be?
A: I would say don’t get greedy. I’m doing the ProShares Ultra Technology (ROM) $120-$125 call spread for May expiration—the longest expiration they offer. That gives you about 100% return in 6 months; 100% is good enough for me because then I’ll do the same thing again in May and get another 100%. What’s 100% x 100%? It’s 400% because you’re reinvesting a much larger capital base the second time around. If a 100% profit in six months is not enough for you then you are in the wrong line of business.
Q: Do you think Ethereum (ETHE) has long-term potential upside?
A: Yes, is a 10X move enough? We just had a major new high in Ethereum because they made moves to limit the production of new Ethereum. Ethereum is the superior technology because its architecture avoids the code repeats that Bitcoin does and therefore only uses a third of the electricity to create. But Bitcoin is attracting the big institutional cash flows because they have an early mover advantage. By the way, how much electricity does crypto mining consume? The entire consumption of Washington state in a year, so it’s a big deal.
Q: What should I do about Crisper Therapeutics (CRSP)?
Crispr Therapeutics (CRSP) is my other disaster for this year because ignored the move up to $170—we’re now back into the $90’s again. So, I have 2023 LEAPS on that; I’m going to keep them, I’ve already suffered the damage, but the next time it goes up to $170 I’m selling! Once burned, twice forewarned. And part of the problem with the whole biotech sector is we are now in the back end of the pandemic and anything healthcare-related will get hit, except for the vaccine stocks like Pfizer (PFE) which are still making billions and billions of dollars.
Q: I bought Baidu (BIDU) and Alibaba (BABA) years ago at a much lower price and I'm still up quite a lot; what should I do?
A: If you have the big cushion, I would keep them and look for #1 recovery in the Chinese economy next year and #2 for the government to back off from their idiotic anticapitalism strategy because it’s costing them so much money.
Q: Is Robinhood (HOOD) a good LEAP candidate?
A: Only on a really big dip, and then you want to go out two years. With a stock that’s volatile as hell like Robinhood and could drop by half on no notice, so you only buy the big dips. It’s not a slowly grinding upward stock like Goldman Sachs (GS) and Morgan Stanley (MS) where you can add LEAPS now because you know it’s going to keep grinding up.
Q: How can Morgan Stanley go up when the chief strategist is bearish?
A: Their customers aren't listening to their chief strategist—they’re buying. And the volume of the stock, which is where Morgan Stanley makes money, is going through the roof, they’re making record profits there. And I've got Morgan Stanley stock coming out of my ears in LEAPS and so forth.
Q: What are 5 stocks you would buy right now?
A: Easy: Google (GOOGL), Microsoft (MSFT), Morgan Stanley (MS), Goldman Sachs (GS), and JP Morgan (JPM). Buy whatever is down that day. They’re all going up.
Q: Too late to buy Tesla (TSLA) calls?
A: Yes, it is. Tesla has a long history of 40% corrections; we had one that ended in May, and then it doubled (and then some). So yeah, too late to buy the calls here. Go back and read my research from May which said buy the stock and you get a car for free—and that worked again, except this time, you can get three free Tesla’s. A lot of subscribers have sent me pictures of their Teslas they got for free on my advice; I’m probably the largest salesman for Tesla for the last 10 years and all I got out of it was a free Powerwall (the red one)..
Q: How much higher do you think semiconductor companies will go?
A: Higher but it’s impossible to quantify. You’re getting very speculative short-term buying in there. So, I think it continues to the rest of the year, but with chips, you never know.
Q: Would you be buying Crispr Therapeutics (CRSP) at these levels?
A: Yes, but I would either just buy the stock and not be dependent on the calendar or buy a 2 ½ year LEAP and get an easy double on that.
Q: What about the currencies?
A: I don’t see much action in the currencies as long as the US is raising interest rates. I think the Euro (FXE), the Aussie (FXA), and the British pound (FXB) will be dead for the time being. Nobody wants to sell them but nobody wants to buy them either when you’re looking at a potential short term rise in the dollar from rising interest rates.
Q: What stable coins are the right answer for cryptocurrency?
A: The US dollar stable coin, but for price appreciation, you’re really looking at Bitcoin and Ethereum. Stable coins are stable, they don’t move; you want stuff that’s going to go up 5, 10, or 20 times over the next 10 years like Bitcoin (BITO) and Ethereum (ETHE). That is my crypto answer.
Q: What should I do about the iShares 20 Plus Year Treasury Bond ETF (TLT) $135-$140 put spread expiring in January?
A: If we get another run down to the $141 level that we saw last month, I would come out of all short treasury positions because you’re starting to run into time decay problems with the January expirations. And in case we remain in a range for some reason, I would be taking profits at the bottom end of the range. It was my mistake that I didn’t grab those profits when we hit $141 last time. So don’t let profits grow hair on them, they tend to disappear. We lost six months on this trade due to the delta virus and the mini-recession it brought us.
Q: Will there be accelerated tech selling in December because of the new tax rates?
A: What new tax rates? There has been no new tax bill passed and even if there were, I think people wouldn’t tax sell this year because the profits are enormous. They would rather do any selling in January at higher prices and then defer payment of those taxes by 18 months. I don’t think there will be any tax issues this year at all.
Q: What’s your return on solar power investments?
A: My break-even was four years because our local utility, PG&E, went bankrupt and the only way they're getting out of bankruptcy is raising electricity prices by 10% a year. It turns out that as a result of global warming, the panels have operated at a higher efficiency as well, so we’re getting a lot more power output than originally expected. Now I get free electricity for the remaining 20-year life of the panels which is great because with two Tesla’s and all-electric heating and air conditioning I use a lot of juice. My monthly bill is a sight to behold. I also power the 20 surrounding houses and for that PG&E pays me $1,800 a month.
Q: Do you see China (FXI) invading Taiwan as a potential threat to the market?
A: China will never invade Taiwan. They own many of the companies they're already in, they de facto control Taiwan government from a distance; they would not risk the international consequences of an actual invasion. And we have the US seventh fleet there to stop exactly that. So, they can make all the noise they want but nothing will come of it. I’ve been watching this for 50 years and nothing has ever happened.
Q: Would you buy ProShares Ultrashort 20+ Treasury ETF (TBT) here?
A: Absolutely, with both hands, all I can get.
Q: Can you recommend any water ETF opportunity?
A: Yes there is one I wrote a piece on last month. It’s the Claymore S&P Global Water Index ETF (CGW).
Q: How long can you hold the (TBT) before time decay hurts?
A: It doesn’t hurt, the cost of the TBT is two times the 10-year rate. So that would be 3%, plus 1% a year for management fees, and that’s your slippage on the TBT in a year right now—it’s 4%. Remember if you’re short the bond market, you have to pay the coupon when you’re short. Double the bond market and you have to pay double the coupon.
Q: Is the ProShares Bitcoin Strategy ETF (BITO) a good alternative to buying bitcoin?
A: I would say yes because I’ve been watching the tracking on that very carefully and it’s pretty damn close. Plus there’s a lot of liquidity there, so yeah, buy the (BITO) ETF on dips and dollar cost average.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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Several external events have prompted Silicon Valley giants to unveil a predecessor to what effectively could become a de facto social credit system by the end of this decade.
I would argue that it is already here, and we are just blind to it.
Take short-term housing agent Airbnb (ABNB) and their business model.
Try searching for a specific listing in any city with a certain date, number of guests.
If you ask other friends and family around the world to input the same data into the same listing, prices will vary greatly.
This is intentionally done because pricing depends on the profile of a certain customer.
If it is $80 per night for me, it could be $100 for the next person.
Why?
Airbnb has an embedded algorithm that conjures up a de facto social credit score, applies it to the situation, and bam — you get your price.
Through my rough research, I have found that males tend to get charged less and especially males wielding a financial profile from a rich country.
I honestly am not sure what data Airbnb is privy to, whether it is only based on a customer’s prior internal Airbnb history, or if it is pieced together from other “sources.”
I am not sure, but if they somehow have access to alternative sources to understand their client better, they might already know that this 47-year-old John Doe booking a 3-night stay in Chicago, Illinois earns $300,000 per year, 1 out of his 5 credit cards is American Express among others, he reported $300,000 of Bitcoin profits in 2020 to the IRS and he owns 3 mansions in Miami, Florida.
It would almost be safe to say that this John Doe would get a better daily rate on the same Airbnb listing than if a 19-year-old student from Albania with no credit card, no assets, and no income tried to book the same listing.
Of course, this also goes for a hardworking single mother trying to take her kids on vacation. So, in the end wealthy men get benefited by a system with discounts that other customers could probably use. But, I guess that's just business in corporate America.
This is just the beginning of the race to pad a soft social credit system so tech companies and others can charge different prices to different people, or maybe not sell some customers services at all.
Relying on an indirect boost from D.C., corporate America will attempt to force the most profound changes our society has seen during the internet era.
Last week, PayPal (PYPL) announced they would start to crack down on users that did not use their platform responsibly.
This group could potentially lose access to PayPal’s services.
PayPal says the collected information will be shared with other financial firms and politicians.
Facebook (FB) is adopting similar practices, recently introducing messages that ask users to snitch on their potentially “extremist” friends.
At the same time, Facebook and Microsoft are working with several other web giants and the United Nations on a database to block potential extremist content.
Some banking platforms already have announced a ban on certain legal purchases, such as firearms.
The growth of such restrictions will accelerate to every part of the business world.
The potential scope of the soft social credit system under construction is enormous and the data exchange practices could have all tech companies swapping customer info in some type of private network that is only accessible to them.
A creation of a “Digital Dollar” would put the tools in place to make sure customer data and flow of money are followed to the very kilobyte.
Working in conjunction with major tech companies, citizens convicted of a crime could lose their ability to transact any business as well.
On a business level, this is great for all the big Silicon Valley companies involved because they would be more efficient at deploying the business intelligence at hand to make money.
I won’t go through the Rolodex of tech companies that are in the data business, but anything involving the cloud and anything in the cloud making great margins, will go gangbusters if this is allowed to happen, which it's looking like it will.
Imagine how conversion rates at Facebook, Google (GOOGL), and Amazon (AMZN) will skyrocket because they already know how to sell stuff to the end guy.
Imagine how Airbnb could ban guests before they even had a chance to destroy somebody’s residence or give generous rates to big spenders that would encourage even more big spending.
This is essentially the dream of Silicon Valley, not for only ad tech like Roku, The Trade Desk, Snapchat, and so on, but the software companies too.
Accurate and voluminous data means better decisions and a super-charged business model.
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