Mad Hedge Technology Letter
January 28, 2019
Fiat Lux
Featured Trade:
(BUY DIPS IN SEMIS, NOT TOPS),
(XLNX), (LRCX), (AMD), (TXN), (NVDA), (INTC), (SOXX), (SMH), (MU), (QQQ)
Tag Archive for: (QQQ)
Don’t buy the dead cat bounce – that was the takeaway from a recent trading day that saw chips come alive with vigor.
Semiconductor stocks had their best day since March 2009.
The price action was nothing short of spectacular with names such as chip equipment manufacturer Lam Research (LRCX) gaining 15.7% and Texas Instruments (TXN) turning heads, up 6.91%.
The sector was washed out as the Mad Hedge Technology Letter has determined this part of tech as a no-fly zone since last summer.
When stocks get bombed out at these levels - sometimes even 60% like in Lam Research’s case, investors start to triage them into a value play and are susceptible to strong reversal days or weeks in this case.
The semi-conductor space has been that bad and tech growth has had a putrid last six months of trading.
In the short-term, broad-based tech market sentiment has turned positive with the lynchpins being an extremely oversold market because of the December meltdown and the Fed putting the kibosh on the rate-tightening plan.
Fueled by this relatively positive backdrop, tech stocks have rallied hard off their December lows, but that doesn’t mean investors should take out a bridge loan to bet the ranch on chip stocks.
Another premium example of the chip turnaround was the fortune of Xilinx (XLNX) who rocketed 18.44% in one day then followed that brilliant performance with another 4.06% jump.
A two-day performance of 22.50% stems from the underlying strength of the communication segment in the third quarter, driven by the wireless market producing growth from production of 5G and pre-5G deployments as well as some LTE upgrades.
Give credit to the company’s performance in Advanced Products which grew 51% YOY and universal growth across its end markets.
With respect to the transformation to a platform company, the 28-nanometer and 16-nanometer Zynq SoC products expanded robustly with Zynq sales growing 80% YOY led by the 16-nanometer multiprocessor systems-on-chip (MPSoC) products.
Core drivers were apparent in the application in communications, automotive, particularly Advanced Driver Assistance Systems (ADAS) as well as industrial end markets.
Zynq MPSoC revenues grew over 300% YOY.
These positive signals were just too positive to ignore.
Long term, the trade war complications threaten to corrode a substantial chunk of chip revenues at mainstay players like Intel (INTC) and Nvidia (NVDA).
Not only has the execution risk ratcheted up, but the regulatory risk of operating in China is rising higher than the nosebleed section because of the Huawei extradition case and paying costly tariffs to import back to America is a punch in the gut.
This fragility was highlighted by Intel (INTC) who brought the semiconductor story back down to earth with a mild earnings beat but laid an egg with a horrid annual 2019 forecast.
Intel telegraphed that they are slashing projections for cloud revenue and server sales.
Micron (MU) acquiesced in a similar forecast calling for a cloud hardware slowdown and bloated inventory would need to be further digested creating a lack of demand in new orders.
Then the ultimate stab through the heart - the 2019 guide was $1 billion less than initially forecasted amounting to the same level of revenue in 2018 - $73 billion in revenue and zero growth to the top line.
Making matters worse, the downdraft in guidance factored in that the backend of the year has the likelihood of outperforming to meet that flat projection of the same revenue from last year offering the bear camp fodder to dump Intel shares.
How can firms convincingly promise the back half is going to buttress its year-end performance under the drudgery of a fractious geopolitical set-up?
This screams uncertainty.
Love them or crucify them, the specific makeup of the semiconductor chip cycle entails a vulnerable boom-bust cycle that is the hallmark of the chip industry.
We are trending towards the latter stage of the bust portion of the cycle with management issuing code words such as “inventory adjustment.”
Firms will need to quickly work off this excess blubber to stoke the growth cycle again and that is what this strength in chip stocks is partly about.
Investors are front-running the shaving off of the blubber and getting in at rock bottom prices.
Amalgamate the revelation that demand is relatively healthy due to the next leg up in the technology race requiring companies to hem in adequate orders of next-gen chips for 5G, data servers, IoT products, video game consoles, autonomous vehicle technology, just to name a few.
But this demand is expected to come online in the late half of 2019 if management’s wishes come true.
To minimize unpredictable volatility in this part of tech and if you want to squeeze out the extra juice in this area, then traders can play it by going long the iShares PHLX Semiconductor ETF (SOXX) or VanEck Vectors Semiconductor ETF (SMH).
In many cases, hedge funds have made their entire annual performance in the first month of January because of this v-shaped move in chip shares.
Then there is the other long-term issue of elevated execution risks to chip companies because of an overly reliant manufacturing process in China.
If this trade war turns into a several decades affair which it is appearing more likely by the day, American chip companies will require relocating to a non-adversarial country preferably a democratic stronghold that can act as the fulcrum of a global supply chain channel moving forward.
The relocation will not occur overnight but will have to take place in tranches, and the same chip companies will be on the hook for the relocation fees and resulting capex that is tied with this commitment.
That is all benign in the short term and chip stocks have a little more to run, but on a risk reward proposition, it doesn’t make sense right now to pick up pennies in front of the steamroller.
If the Nasdaq (QQQ) retests December lows because of global growth falls off a cliff, then this mini run in chips will freeze and thawing out won’t happen in a blink of an eye either.
But if you are a long-term investor, I would recommend my favorite chip stock AMD who is actively draining CPU market share from Intel and whose innovation pipeline rivals only Nvidia.
Global Market Comments
October 15, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or OUR HARD LANDING BACK ON EARTH),
(SPY), (QQQ), (TLT), (VIX), (VXX), (MSFT), (JPM), (AAPL),
(DECODING THE GREENBACK),
(DUMPING THE OLD ASSET ALLOCATION RULES)
Truth be told, it’s the really boring, sedentary, go-nowhere markets that drive me nuts, cause me to tear my hair out, and urge me on to an early retirement.
The week started with such promise.
Sunday night I witnessed the first Space X landing of a rocket in California which I could clearly see from the top of Berkeley’s Grizzly Peak some 250 miles away. It was fascinating to see four separate jets steer the spacecraft earthward.
Financial markets had a different landing in mind, the hard kind, if not a crash.
I absolutely love the market we had last week which saw the third biggest down day in history, volatility explode, and $2.6 trillion in stock market capitalization vaporize.
I had to blink when I saw NASDAQ (QQQ) down an incredible 350 points in one day. My Mad Hedge Market Timing Index hit an all-time low at 4.
No wonder insider selling hit $10.3 billion in August, another record. Maybe they know something we don’t.
Chinese Gamer Tencent Postponed their US IPO. It seems they noticed that market conditions had become unfavorable. I know investment bankers hate passing on an opportunity to ring the cash register. I used to be one.
There is no better feeling than being 100% cash going into one of these crashes and then having panicked investors puke their best quality positions to me at a market bottom.
On Thursday, I backed up the truck and issued four perfectly timed Trade Alerts, picking up Microsoft (MSFT), Apple (AAPL), and the S&P 500 (SPY), and covering my short position in the bond market (TLT).
In fact, I believe I had my best week of the year even though I only added modestly to my annual return. Look at the charts below and you’ll see that I suffered a 9% drawdown during the February meltdown. Maybe I’m getting wiser as I get older? One can only hope.
This time, I managed to limit my loss to a modest 2.5% and am nearly unchanged on the month despite the Dow Average at one point nearly giving up all its gains for 2018. This is also against a horrific backdrop of hedge fund performance that is now showing losses for 2018.
The Volatility Index (VIX) made a move for the ages, at one point kissing the $29 handle, up from $11 two weeks ago. During the 600-point swoosh down on Thursday, I couldn’t get any of my staff on the phone. The entire company was logged into their personal trading accounts, buying puts on the iPath S&P 500 VIX Short-Term Futures ETN (VXX) as fast as they could.
Which leads me to believe that the bottom is near. Earnings and valuation support start kicking in big time at these levels, and the blackout period for company share buybacks started ending with the bank earnings last Friday.
When you take a $1 trillion buyer out of the market, it has a huge effect no matter how strong the fundamentals are. Start buying those dips. Their return is similarly eventful. I’ve already started to invest my 95% cash position.
Further eroding confidence was the president’s statement that the Federal Reserve is crazy. So, now we know the president appoints crazy people to the most important financial positions in the country. White House control of interest rates ahead of elections. Why didn’t I think of that?
Sparking the Friday melt-up was a statement by JP Morgan (JPM) CEO Jamie Diamond saying that a 40-basis point rise in rates is no big deal. The bull market is on. His earnings beat all expectations.
My 2018 year-to-date performance has bounced back to 27.56%, and my trailing one-year return stands at 35.87%. October is almost flat at -0.84%. Most people will take that in these horrific conditions.
My nine-year return appreciated to 304.03%. The average annualized return stands at 34.41%.
This coming week will be pretty sedentary on the data front.
Monday, October 15 at 8:30 AM brings us September Retail Sales.
On Tuesday, October 16 at 9:15 AM, September Industrial Production is announced.
On Wednesday, October 17 at 8:30 AM, September Housing Starts are published.
Thursday, October 18 at 8:30, we get Weekly Jobless Claims. At 10:00 we learne the September Index of Leading Economic Indicators.
On Friday, October 19, at 10:00 AM, the September Housing Starts are out. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I will spend this week on my Southeastern US roadshow, giving strategy luncheons in Savannah, GA, Atlanta, GA, Miami, FL, and Houston, TX. I love meeting my readers mano a mano who are often a source of my best trading ideas. It looks like I’ll miss Hurricane Michael by three days.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Off to Lunch
Global Market Comments
July 27, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, AUGUST 3, 2018,
AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(STOCKS TO BUY ON THE OUTBREAK OF TRADE PEACE),
(QQQ), (SPY), (SOYB), (CORN), (WEAT), (CAT),
(DE), (BA), (QCOM), (MU), (LRCX), (CRUS),
(ORIENT EXPRESS PART II, or REPORT FROM VENICE)
So, how will the trade war end? It could be the crucial trading call of 2018.
"That which can't continue, won't," I paraphrase the noted economist Herbert Stein. I think that logic neatly applies to our global trade wars today.
In 1970, some 25% of world GDP was accounted for by international trade. Today it is 52%. Germany has been the powerhouse, with trade growing from 25% to 80%, largely through exploding auto exports. Trade growth in the U.K. has been pitiful as the old colonial ties loosened, improving only from 40% of GDP to 52%.
In the U.S., trade has grown from 10% to 25% of GDP during this time. It is far lower than the rest of the G7 nations because of the massive size of its domestic economy.
Still, placing restraints on 25% of U.S. GDP, or about $5 trillion, is quite a big hit. Think an imminent recession, quite possible a severe one. The $13 billion in subsidies offered the agriculture sector is but a drop in the bucket. It would be like killing off the goose that laid the golden egg.
Trump has a weak hand, which is growing weaker by the day. It is just a matter of time before he folds. Not to do so would entirely wipe out the benefits of the December tax package, yet still leave the U.S. government with $2 trillion in new debt. It is a perfect money destruction machine.
My bet is that Trump will claim victory at some point soon, regardless of what transpires on the negotiation front. Take the trade war away, and stocks will immediately jump 10%. That's what the stock market thinks, with NASDAQ (QQQ) at an all-time high, and the S&P 500 (SPY) just short of one. Stocks are trading over the medium term as if Donald Trump doesn't exist.
Which stocks should you buy when trade peace breaks out? Buy those that have suffered the most. The ags have to be at the top of your list, such as Soybeans (SOYB), Corn (CORN), and Wheat (WEAT), the worst hit. The old industrials such as Caterpillar (CAT), John Deere (DE), and Boeing (BA) also have to be a priority.
In the technology area you have to rotate out of the FANGs and into chip stocks, the worst performers of the sector this year. Perhaps this is what the market is shouting at us with the horrific one-day decline in Facebook (FB) yesterday. China relies on the U.S. for 80% of its chips and all of its high-end graphics cards.
China's canceling of the QUALCOM (QCOM) takeover of its NXP Semiconductors shows to what extent it is willing to retaliate in the tech area. Chip stocks to buy for the rebound should include Micron Technology (MU), Cirrus Logic (CRUS), and Lam Research (LRCX).
Even if the trade war ends tomorrow, business conditions will never be the same. Confidence in American reliability will never completely recover. Sure, Trump will be gone in 2 1/2 years. But what if he is replaced by someone worse? Trading with the United States now incurs a level of political risk not seen since the War of 1812, when Washington burned.
But no trade war is certainly better than a trade war if you are a trader or investor.
Telling the Captain How to Steer the Ship
Global Market Comments
July 23, 2018
Fiat Lux
Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS
GLOBAL STRATEGY DINNER),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or IT'S SUDDENLY BECOME CRYSTAL CLEAR),
(SPY), (TLT), (QQQ),
(AMZN), (MSFT), (MU), (LRCX),
(REPORT FROM THE ORIENT EXPRESS)
Maybe it's the calming influence of the sound of North Atlantic waves crashing against the hull outside my cabin door for a week. Maybe it was the absence of an Internet connection for seven days, which unplugged me from the 24/7 onslaught of confusing noise.
But suddenly, the outlook for financial markets for the rest of 2018 has suddenly become crystal clear.
I'll give you the one-liner: Nothing has changed.
Some nine years and four months into this bull market, and the sole consideration in share pricing is earnings. Everything else is a waste of time. That includes the Greece crisis, the European debt crisis that drove MF Global under, two presidential elections, the recent trade wars, even the daily disasters coming out of the White House.
Keep your eye focused on earnings and everything else will fade away into irrelevance. It that's simple.
As I predicted, the markets are stair-stepping their way northward ahead of each round of quarterly earnings reports.
And now that we know what to look at, the future looks pretty good.
The earnings story, led by big tech, is alive and well. After a torrid Q1, which saw corporate earnings grow by a heart palpitating 26%, we are looking for a robust 20% for Q2, 23% in Q3, and another 20% in Q4.
The sushi hits the fan when Q1 2019 earnings grow by a mere 5% YOY as the major elixir of tax cuts wear off, leaving us all with giant hangovers.
Amazon (AMZN), Netflix (NFLX), and Microsoft (MSFT), all Mad Hedge recommendations over the past year, account for 70% of the total market gains this year.
Look at the table below and you see there has only been ONE trade this year and that has been to buy technology stocks. Everything else, such as oil, the S&P 500 (SPY), the U.S. dollar (UUP) has been an also-ran, or an absolute disaster. And we nailed it. Some 80% of our Trade Alerts this year have been to buy technology stocks.
The gasoline poured on the fire by the huge corporate tax cuts are only now being felt by the real economy. Q2 GDP growth could run as hot as 4%. But there is a sneaking suspicion in the hedge fund industry that these represent peak earnings for the entire economic cycle.
Corporate stock buybacks hit a new all-time high in Q2, as companies repatriate cash hoards from abroad at extremely preferential tax rates to buy back their own shares.
Trade wars are certainly a worry. But retaliation is directed only at Trump supporting red states, which accounts for only a tiny share of U.S. corporate profits. Technology stocks, which account for half of all American profits, have largely been immune, except for the chip sector (MU), (LRCX), which has its own cyclical problems.
Yes, we know this will all end in tears. The yield curve will invert in a year, taking short-term interest rates higher than long-term ones, triggering a recession and a bear market. But the final year of a bull market is often the most profitable as prices go ballistic. You would be a fool to stay scared out of stocks by headline risk and an uncertain Twitter feed.
Yes, early leading indicators of a coming recession are popping up everywhere now. A stunning 12.3% drop in June Housing Starts has to be at the top of anyone's worry list, as rising home mortgage rates and disappearing tax deductions take their pound of flesh. It was the worst report in nine months.
The trade wars promise to leave the Detroit auto industry in substantially reduced form, or at least, the stock market believes so. And a 10-year U.S. treasury bond yield that has been absolutely nailed in a 2.80% to 2.90% range for three months is another classic marketing topping indicator.
I'll let you know when it is time to pull up stakes and head for higher ground. Just keep reading the Diary of a Mad Hedge Fund Trader.
As I have been at sea and out of the markets, my 2018 year-to-date performance remains unchanged at an eye-popping 24.82%, and my 8 1/2-year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.
This coming week will be a very boring week on the data front.
On Monday, July 23, there will be nothing of note to report.
On Tuesday, July 24 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.
On Wednesday, July 25 at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST the Fed is expected to raise interest rates by 25 basis points. At 2:30 Fed governor Jerome Powell holds a press conference.
Thursday, July 26, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.
On Friday, July 27 at 9:15 AM EST we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, I am going to attempt to think of more great thoughts this afternoon while hiking up to the Hornli Hut at 11,000 feet on the edge of the Matterhorn, a climb of about 5,000 feet out the front door of my chalet. I always seem to think of my best ideas while hiking uphill. The liter of Cardinal beer and a full plate of bratwurst with rosti potatoes will make it all worth it.
Good luck and good trading.
0
Mad Hedge Technology Letter
July 18, 2018
Fiat Lux
Featured Trade:
(IS NETFLIX DEAD?),
(NFLX), (AMZN), (FB), (TWTR), (DIS), (GOOGL), (QQQ)
Too far out over their skis.
For the first time in five quarters, Netflix (NFLX) was unable to eclipse the alpine level like expectations prognosticated by its own senior management.
Netflix and Amazon (AMZN) have been given luminary status at the Mad Hedge Technology Letter because the straight-line price action offers such agonizing entry points for investors, along with the best business growth models in the American economy.
Chasing this stock has usually worked out for the better, but leading up to the latest quarterly earnings report, Netflix started to scrunch up.
The firing squad loaded up its bullets and after Friday's close, shots were rained down on Netflix's parade as it failed to beat the only metric significant to Netflix investors - new subscribers.
The numbers were not even close.
Netflix fizzled out on its domestic subscriber's growth metric by 560,000, when 1.23 million new subscribers were expected.
International numbers succumbed to the inevitable, but less in percentage terms, failing to surpass the expected 5.11 million, only successfully adding 4.47 million new subscribers.
The 5.2 million adds out of the expected 6.3 million expected is the best news that has happened to Netflix in a long time if you are underinvested in this name.
Ravenous investors looking to jump on Netflix's bandwagon are licking their chops.
After-hours trading saw the stock tank, falling down the rabbit hole by almost 15%.
The stock had only recently been trading around an all-time high of $419. Fluffing their lines has given investors a much-awaited entry point into one of the creme de la creme growth stories in the vaunted tech sector.
Let's get a little more granular, shall we?
Even for high-flying tech stocks, the velocity of the price surges has put off many investors calling the stock "overbought."
Netflix shares were up 108% in 2018 before profit taking commenced before the earnings call. It was unusual to see Netflix intraday slide of 4%.
Investors smelled a rat.
It was only a matter of time before normal investors were finally given a chance to swiftly pile into this precious gem of a stock.
That time is now.
UBS analyst Eric Sheridan recently declared Netflix's growth story as "all priced in."
I don't buy it.
Yes, the shares got ahead of itself, but the Netflix narrative is still intact.
Over the earnings call, Netflix CEO Reed Hastings gushed about the current state of the company remarking that "fundamentals have never been stronger."
The bad news is that it missed on overzealous estimates; the good news is it added 5.2 million new subscribers.
Don't forget that in Q1 2018, Netflix beat total estimates by a herculean 920,000 subscribers, which is around what it missed by in Q2 2018.
The most recent quarter was overwhelmed by World Cup 2018 fever, with audiences migrating toward probably the most dramatic and exciting World Cup in history and the first to be streamed.
The most popular sporting event in the world gave Netflix a short-term kick in the cojones, delaying many new subscription sign-ups until after France lifted the trophy for the second time in its illustrious history.
The Twitter (TWTR) and Facebook (FB) numbers back up this thesis, experiencing explosive engagement and ad buying over the monthlong tournament boding well for their next earnings results.
Don't worry investors.
These eyeballs are just temporary.
The tournament offering a short-term bump to social media stocks clearly is just a one-off event that happens one summer out of every four.
Any recent profit taking will see the same investors eyeing a lower cost basis after this share dump.
Netflix won't be down for long.
Let's briefly review some of Netflix's cornerstone advantages:
The massive user migration from linear television to over-the-top content (OTT) led by cord-cutting millennials, responsible for a growing slice of domestic purchasing power.
The inherent advantages of a global over-the-top content (OTT) streaming model, applying massive scale with the cheap marginal cost of current technology.
The first-mover advantage that has allowed Netflix to have its own cake and eat it.
And the competition's laggardly response to Netflix eating its own cake.
Netflix CFO David Wells' take on the missed targets was "lumpiness" in the business and brushed it off like a bug crawling up your leg.
Hastings also chimed in about the increased competition shaping up and Disney (DIS), HBO, and other players finally getting their act together.
He mentioned there is room for multiple players in this industry, but they better not show up to the gunfight with a knife.
Netflix has been weaning itself from Disney's, Fox's and other third-party content for years, along with spending 50% more on marketing in 2018.
Ted Sarandos, chief content officer of Netflix, let it be known that 85% of new spending will be on original content in 2018.
Out of $8 billion earmarked for content in 2018, a colossal $6.8 billion is set to be splashed on in-house productions.
Compare this with the competition of Amazon, which plans to spend $4.5 billion on original content in 2018 and Hulu's plan to spend $2.5 billion in 2018.
Down the road, Netflix will have greater ability to finance its expensive content spend as it has flipped to a profit-making entity.
Amazon uses its AWS (Amazon Web Services) arm to fund its various subsidiaries.
The high level of quality content is reflected in the 40 Emmy nominations garnered by Netflix, in effect crushing stalwart HBO.
Netflix is aggressively courting Hollywood's A-list and poaching them in droves.
Proven content creators such as Ryan Murphy, Shonda Rhimes, Shawn Levy and Jenji Kohan are now on Netflix's payroll, and are a vital reason for the uptick in quality programming.
This successful harvest will result in added brand recognition and elevated prestige for current and future eyeballs.
Netflix will push out around 1,000 original programs in 2018. More than 90% of Netflix's subscribers habitually watch its vast portfolio of original programming.
The only way Netflix can be stopped is if it stops itself.
The pipeline is plush, and it is not all priced into the stock yet.
Next year could be the year India and Japan massage the bottom lines to greater effect, as Netflix double downs on the international arena.
Netflix's first original Indian series "Sacred Games" has been a winner, and its first original movie "Lust Stories" is creating a stir among avid Indian movie followers.
CEO Hastings has gone on record stating the "next 100 million" Netflix subscribers will derive from the land of Taj Mahal and chicken tikka masala.
Netflix has a lot of work to do to catch up with entrenched leaders Hotstar and Alphabet's (GOOGL) YouTube India.
About 800 million Indians have never been online before. The screaming potential India offers cannot be found elsewhere, especially with films historically, deeply embedded inside India's ancient culture.
Next month will see the release of "Ghoul," based on critically acclaimed work by authors Salman Rushdie and Aravind Adiga.
Slated for imminent release is also Mumbai Indians, a documentary about a top team in the locally obsessed Indian Premier League cricket tournament.
GBH Insights' internal research has found that Netflix is watched 10 hours per week in American households.
That number will inevitably grow as the quality of content goes from strength to strength for this first-rate company.
And how did Netflix's shock miss affect the Nasdaq (QQQ) on the next trading day?
It showed the resiliency and intestinal fortitude that has been a hallmark of the tech sector bull market.
The latest earnings result snafu is a surefire chance to finally have a little taste of Netflix. It will be back over $400 in no time.
________________________________________________________________________________________________
Quote of the Day
"If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner," - said retired U.S. Army General Omar Bradley.
