Posts

August 27, 2019

Global Market Comments
August 27, 2019
Fiat Lux

Featured Trade:

(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT),
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL)

July 29, 2019

Mad Hedge Technology Letter
July 29, 2019
Fiat Lux

Featured Trade:

(THE RACE TO THE BOTTOM),
(SCHW), (FB), (SQ), (WMT), (AMZN), (FFIDX), (BOX)

The Race to the Bottom

Gone are the days of brokers shouting from the trading pits, a bygone era where pimple-faced traders cut their teeth rubbing shoulders with the journeymen of yore.

The stock brokerage industry is at an inflection point with the revolutionary online stock brokerage Robinhood on the verge of shaking up an industry that has needed shaking up for years.

A common thread revisited by this newsletter is the phenomenon of broker apps being low-quality tech.

A broker ultimately serves little or no value to the real players among the deal, usually extracting huge commissions.

Technology and now blockchain technology vie to completely remove this exorbitant layer from the business process.

Well, for the stock brokerage industry, that time is now.

Robinhood is an online stock brokerage company based in Menlo Park, Calif., trading an assortment of asset classes including equities, options, and cryptocurrencies.

So, what’s the catch?

Robinhood does not charge commission.

That’s right, you can invest up until the $500,000 threshold protected by the Securities Investor Protection Corporation (SIPC) and you can go along with your merry day trading for free.

The online brokerage industry has been getting away with murder for years.

They got comfortable and stopped innovating – the death knell of any company in 2019.

Effectively, high execution costs reaping massive profits were the norm for brokers, and nobody questioned this philosophy until Robinhood exposed the ugly truth – unreasonably high rates.

Peeking at a monthly chart of brokerage costs will make your stomach churn.

For instance, a trader frequently executing trades with an account of $100,000 would hand over $1836 in commission in 2017 if their account was with Fidelity.

On the cheaper side, Interactive Brokers would charge $854 for its brokerage services to habitual traders per month.

The outlier was Tradier, a start-up brokerage founded in 2014 using the powerful tool of an Application Programming Interface (API) which charged $213 per month to trade frequently.

An API is described as a software intermediary allowing two applications to communicate with each other.

This model helped cut costs for the online brokerage because Tradier did not have to focus its funds on the trading platform that was delegated to various third-party platforms.

Tradier is largely responsible for the aggregation of data and charts thus employing an army of developers to meet their end of the business.

This model is truly the democratization of the online brokerage industry, which has been coming for years.

Costs are cut to a minimum with equity trades at Tradier costing investors $3.49 per order and options contracts costing $0.35 per contract with a $9 options assignment and exercise fee.

Technology has defeated the traditionalist again.

More than 80% of Robinhood’s accounts are owned by millennials – as expected.

Trading cryptocurrencies act as a gateway asset to springboard into other asset classes such as equities and derivative contracts.

Vlad Tenev, co-CEO of Robinhood, indicated that Robinhood will have to modify its radical business model to monetize more of the business in the future, but he is comfortable with the current business model.

But Tenev has already seen fruit borne with the likes of Robinhood applying fierce pressure to the legacy brokerages’ pricing models.

The traditionalists are locked in a vicious pricing war with each other slashing their commission rates to stay competitive.

The longer the likes of Charles Schwab (SCHW) feel it necessary to charge $4.95, down from the January 2017 cost of $8.95, the better the chances are that Robinhood can build its account base rapidly.

Charles Schwab has more than 10 million accounts, only double the number of Robinhood, after being founded in 1971.

The 42-year head start over Robinhood has not produced the desired effect, and it is ill-prepared to battle these tech companies that enter the fray.

Robinhood has been able to add a million new accounts per year. If Charles Schwab relatively performed at the same rate, it would have 47 million accounts open today.

It doesn’t and that is a problem because the company can be caught up to.

The age of specialization is upon us with full force, and customer demand requires care and diligence that never existed before.

Robinhood continues to enhance its offerings of various products adding Litecoin and Bitcoin Cash to the crypto lineup.

Only Bitcoin and Ethereum were offered before.

And there is one more outrageous thing I forgot to tell you.

Robinhood hopes to snatch away the traditional savings account by offering checking and savings accounts with an interest rate almost 30 times larger than most brick and mortar banks – 3%.

These accounts would have no minimum balances or no fees that nickel and dime customers.

The service will conveniently sit alongside its trading app and this move into the industry led by JP Morgan could start to derail Wall Street.

As with most FinTech start-ups, the roll-out of this new service was slightly botched because Robinhood failed to get the go-ahead from regulators concerning ensuring the accounts properly.

All this does is delay the inevitable and by spring 2019, potential customers should be earning 3% in Robinhood’s checking and savings account.

Sign me up!

 

May 14, 2019

Global Market Comments
May 14, 2019
Fiat Lux

Featured Trade:

(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT)

May 6, 2019

Mad Hedge Technology Letter
May 6, 2019
Fiat Lux

Featured Trade:

(PAYPAL GOES FROM STRENGTH TO STRENGTH)
(PYPL), (SQ), (GOOGL), (LYFT)

PayPal Goes From Strength to Strength

It’s time to revisit one of my favorite tech picks for 2019 that is a constant trade alert candidate.

The attention is warranted with the stock performance delivering a tidal wave of euphoria rising around 30% in the first half of 2019.

I expected PayPal to have a great year, but I didn’t expect them to perform better than Square who are growing from a lower install base.

PayPal’s overperformance signals to the wider business establishment how important a broad install base can be that can tap the network effect to reel in profits.

This is how once legacy dinosaurs can reinvent themselves in months.

The lack of entry points is a concern prodding investors to chase the stock if they want a piece of the action.

This is one of the drastic side effects of PayPal’s meteoric rise that has been buttressed by dovish Fed policy.

Investors are literally praying to the skies for any softness in tech earnings reports because for the best of the bunch, there have been no moderate pullbacks of note since last winter.

PayPal did offer a slight data point that might be construed as disappointing when total payment volume (TPV) of $161 billion was slightly lower than the consensus of $163 million for the quarter.

It’s slim pickings for the bear camp with not much to feast on in an otherwise pretty solid earnings report.

As PayPal expanded by 9.3 million new active accounts, bringing its total up to 277 million, management has super charged this legacy fintech company into an outright renaissance.

Doing even more to shed the tag of a legacy company, PayPal invested half a billion dollars at $47 per share into the upcoming Uber IPO signaling possibilities that their payment software could at some point integrate into Uber’s network down the road.

Alphabet (GOOGL) has shown that if you get in early with these Silicon Valley unicorns, synergistic effects are plenty with Alphabet lapping up revenue charging Lyft (LYFT) for providing digital ad capabilities on top of the appreciating value of their investment stake.

And if you remember that way back, PayPal was tied to eBay before it was spun out.

Better to attach future hopes and dreams to a leading visionary and innovator instead of a legacy e-commerce platform.

Illustrating the tough task of turning around eBay, eBay clocked in negative TPV growth of 4% in the past quarter.

PayPal offered us more detail into active-account numbers for its Venmo peer-to-peer service with more than 40 million people using Venmo for at least one transaction in the last 12 months.

Venmo processed $21 billion in TPV last quarter, mushrooming by 73%, while the core PayPal platform’s TPV grew 41% to $42 billion.

The success paved the way to raise its full-year EPS outlook from $2.94 to $3.01 ensuring that its prior forecast on revenue and TPV will be met.

PayPal previously guided lower with an expected $2.84 to $2.91 in adjusted EPS and $17.75 billion to $18.1 billion in revenue.

When we tally up all the positive points, it’s hard to ignore the 12% YOY increase in revenue to $4.13B and the more impressive 37% YOY rise in EPS growth signaling the company is applying its giant scale to maximum effect.

Customer engagement of 37.9 payment transactions per active account rose 9% YOY while the TPV which came in lower than consensus was still growth of 22% YOY.

I love that PayPal has migrated towards the heart of innovation while being a legacy fintech company.

Venmo and the Venmo card are rapidly infiltrating the center of consumer’s daily financial lives wielded for groceries, gas, and restaurants.

In February, PayPal introduced a limited-edition rainbow card which became the fastest adopted Venmo card.

I want to reiterate how the proof is in the pudding with Venmo volume increasing 73% to approximately $21B in the quarter.

Not only does this legacy fintech have super growth drivers, they have become quasi venture capitalists applying a horde of capital to snap up attractive assets.

An example is a $750 million investment in the e-commerce and payments leader in Latin America called MercadoLibre which creates a network effect to PayPal’s core business in the region.

If the steady drip of news wasn’t good enough, PayPal announced a partnership with Instagram to process payments when customers are shopping on Instagram in the U.S.

Management is convincingly delivering the goods with 110 basis points of operating margin expansion.

PayPal’s flawless performance is a great model in how to survive the volatile times of rapid tech shifts, and the best way to alter a model to reduce existential threats.

The company has growth drivers, have migrated capital into growth tech, are innovating with the best of them, and management is executing surgically taking advantage of a massive install base.

Buy on any weakness, entry points are few and far between.

 

 

 

March 6, 2019

Global Market Comments
March 6, 2018
Fiat Lux

Featured Trade:

(WILL UNICORNS KILL THE BULL MARKET?),
(TSLA), (NFLX), (DB), (DOCU), (EB), (SVMK), (ZUO), (SQ),
(A NOTE ON OPTIONS CALLED AWAY), (TLT)

January 17, 2019

Mad Hedge Technology Letter
January 17, 2019
Fiat Lux

Featured Trade:

(WHY FINTECH IS EATING THE BANKS’ LUNCH),
(WFC), (JPM), (BAC), (C), (GS), (XLF), (PYPL), (SQ), (SPOT), (FINX), (INTU)

Why FinTech is Eating the Banks’ Lunch

Going into January 2018, the big banks were highlighted as the pocket of the equity market that would most likely benefit from a rising rate environment which in turn boosts net interest margins (NIM).

Fast forward a year and take a look at the charts of Bank of America (BAC), Citibank (C), JP Morgan (JPM), Goldman Sachs (GS), and Morgan Stanley (GS), and each one of these mainstay banking institutions are down between 10%-20% from January 2018.

Take a look at the Financial Select Sector SPDR ETF (XLF) that backs up my point.

And that was after a recent 10% move up at the turn of the calendar year.

As much as it pains me to say it, bloated American banks have been completely caught off-guard by the mesmerizing phenomenon that is FinTech.

Banking is the latest cohort of analog business to get torpedoes by the brash tech start-up culture.

This is another fitting example of what will happen when you fail to evolve and overstep your business capabilities allowing technology to move into the gaps of weakness.

Let me give you one example.

I was most recently in Tokyo, Japan and was out of cash in a country that cash is king.

Japan has gone a long way to promoting a cashless society, but some things like a classic sushi dinner outside the old Tsukiji Fish Market can’t always be paid by credit card.

I found an ATM to pull out a few hundred dollars’ worth of Japanese yen.

It was already bad enough that the December 2018 sell-off meant a huge rush into the safe haven currency of the Japanese Yen.

The Yen moved from 114 per $1 down to 107 in one month.

That was the beginning of the bad news.

I whipped out my Wells Fargo debit card to withdraw enough cash and the fees accrued were nonsensical.

Not only was I charged a $5 fixed fee for using a non-Wells Fargo ATM, but Wells Fargo also charged me 3% of the total amount of the transaction amount.

Then I was hit on the other side with the Japanese ATM slamming another $5 fixed fee on top of that for a non-Japanese ATM withdrawal.

For just a small withdrawal of a few hundred dollars, I was hit with a $20 fee just to receive my money in paper form.

Paper money is on their way to being artifacts.

This type of price gouging of banking fees is the next bastion of tech disruption and that is what the market is telling us with traditional banks getting hammered while a strong economy and record profits can’t entice investors to pour money into these stocks.

FinTech will do what most revolutionary technology does, create an enhanced user experience for cheaper prices to the consumers and wipe the greedy traditional competition that was laughing all the way to the bank.

The best example that most people can relate to on a daily basis is the transportation industry that was turned on its head by ride-sharing mavericks Uber and Lyft.

But don’t ask yellow cab drivers how they think about these tech companies.

Highlighting the strong aversion to traditional banking business is Slack, the workplace chat app, who will follow in the footsteps of online music streaming platform Spotify (SPOT) by going public this year without doing a traditional IPO.

What does this mean for the traditional banks?

Less revenue.

Slack will list directly and will set its own market for the sale of shares instead of leaning on an investment bank to stabilize the share price.

Recent tech IPOs such as Apptio, Nutanix and Twilio all paid 7% of the proceeds of their offering to the underwriting banks resulting in hundreds of millions of dollars in revenue.

Directly listings will cut that fee down to $10-20 million, a far cry from what was once status quo and a historical revenue generation machine for Wall Street.

This also layers nicely with my general theme of brokers of all types whether banking, transportation, or in the real estate market gradually be rooted out by technology.

In the world of pervasive technology and free information thanks to Google search, brokers have never before added less value than they do today.

Slowly but surely, this trend will systematically roam throughout the economic landscape culling new victims.

And then there are the actual FinTech companies who are vying to replace the traditional banks with leaner tech models saving money by avoiding costly brick and mortar branches that dot American suburbs.

PayPal (PYPL) has been around forever, but it is in the early stages of ramping up growth.

That doesn’t mean they have a weak balance sheet and their large embedded customer base approaching 250 million users has the network effect most smaller FinTech players lack.

PayPal is directly absorbing market share from the big banks as they have rolled out debit cards and other products that work well for millennials.

They are the owners of Venmo, the super-charged peer-to-peer payment app wildly popular amongst the youth.

Shares of PayPal’s have risen over 200% in the past 2 years and as you guessed, they don’t charge those ridiculous fees that banks do.

Wells Fargo and Bank of America charge a $12 monthly fee for balances that dip below $1,500 at the end of any business day.

Your account at PayPal can have a balance of 0 and there will never be any charge whatsoever.

Then there is the most innovative FinTech company Square who recently locked in a new lease at the Uptown Station in Downtown Oakland expanding their office space by 365,000 square feet for over 2,000 employees.

Square is led by one of the best tech CEOs in Silicon Valley Jack Dorsey.

Not only is the company madly innovative looking to pounce on any pocket of opportunity they observe, but they are extremely diversified in their offerings by selling point of sale (POS) systems and offering an online catering service called Caviar.

They also offer software for Square register for payroll services, large restaurants, analytics, location management, employee management, invoices, and Square capital that provides small loans to businesses and many more.

On average, each customer pays for 3.4 Square software services that are an incredible boon for their software-as-a-service (SaaS) portfolio.

An accelerating recurring revenue stream is the holy grail of software business models and companies who execute this model like Microsoft (MSFT) and Salesforce (CRM) are at the apex of their industry.

The problem with trading this stock is that it is mind-numbingly volatile. Shares sold off 40% in the December 2018 meltdown, but before that, the shares doubled twice in the past two years.

Therefore, I do not promote trading Square short-term unless you have a highly resistant stomach for elevated volatility.

This is a buy and hold stock for the long-term.

And that was only just two companies that are busy redrawing the demarcation lines.

There are others that are following in the same direction as PayPal and Square based in Europe.

French startup Shine is a company building an alternative to traditional bank accounts for freelancers working in France.

First, download the app.

The company will guide you through the simple process — you need to take a photo of your ID and fill out a form.

It almost feels like signing up to a social network and not an app that will store your money.

You can send and receive money from your Shine account just like in any banking app.

After registering, you receive a debit card.

You can temporarily lock the card or disable some features in the app, such as ATM withdrawals and online payments.

Since all these companies are software thoroughbreds, improvement to the platform is swift making the products more efficient and attractive.

There are other European mobile banks that are at the head of the innovation curve namely Revolut and N26.

Revolut, in just 6 months, raised its valuation from $350 million to $1.7 billion in a dazzling display of growth.

Revolut’s core product is a payment card that celebrates low fees when spending abroad—but even more, the company has swiftly added more and more additional financial services, from insurance to cryptocurrency trading and current accounts.

Remember my little anecdote of being price-gouged in Tokyo by Wells Fargo, here would be the solution.

Order a Revolut debit card, the card will come in the mail for a small fee.

Customers then can link a simple checking account to the Revolut debit card ala PayPal.

Why do this?

Because a customer armed with a Revolut debit card linked to a bank account can use the card globally and not be charged any fees.

It would be the same as going down to your local Albertson’s and buying a six-pack, there are no international or hidden fees.

There are no foreign transaction fees and the exchange rate is always the mid-market rate and not some manipulated rate that rips you off.

Ironically enough, the premise behind founding this online bank was exactly that, the originators were tired of meandering around Europe and getting hammered in every which way by inflexible banks who could care less about the user experience.

Revolut’s founder, Nikolay Storonsky, has doubled down on the firm’s growth prospects by claiming to reach the goal of 100 million customers by 2023 and a succession of new features.

To say this business has been wildly popular in Europe is an understatement and the American version just came out and is ready to go.

Since December 2018, Revolut won a specialized banking license from the European Central Bank, facilitated by the Bank of Lithuania which allows them to accept deposits and offer consumer credit products.

N26, a German like-minded online bank, echo the same principles as Revolut and eclipsed them as the most valuable FinTech startup with a $2.7 Billion Valuation.

N26 will come to America sometime in the spring and already boast 2.3 million users.

They execute in five languages across 24 countries with 700 staff, most recently launching in the U.K. last October with a high-profile marketing blitz across the capital.

Most of their revenue is subscription-based paying homage to the time-tested recurring revenue theme that I have harped on since the inception of the Mad Hedge Technology Letter.

And possibly the best part of their growth is that the average age of their customer is 31 which could be the beginning of a beautiful financial relationship that lasts a lifetime.

N26’s basic current account is free, while “Black” and “Metal” cards include higher ATM withdrawal limits overseas and benefits such as travel insurance and WeWork membership for a monthly fee.

Sad to say but Bank of America, Wells Fargo, and the others just can’t compete with the velocity of the new offerings let alone the software-backed talent.

We are at an inflection point in the banking system and there will be carnage to the hills, may I even say another Lehman moment for one of these stale business models.

Online banking is here to stay, and the momentum is only picking up steam.

If you want to take the easy way out, then buy the Global X FinTech ETF (FINX) with an assortment of companies exposed to FinTech such as PayPal, Square, and Intuit (INTU).

The death of cash is sooner than you think.

This year is the year of FinTech and I’m not afraid to say it.

 

 

 

January 9, 2019

Mad Hedge Technology Letter
January 9, 2019
Fiat Lux

Featured Trade:

(TOP 8 TECH TRENDS OF 2018),
(GOOGL), (FB), (WMT), (SQ), (AMZN), (ROKU), (KR), (FDX), (UPS), (CRM), (TWLO), (ADBE), (PYPL)