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How PayPal is Destroying Legacy Banking

Gazing into the future, investors know it’s time to deploy strategies to make money in 2019.

This year has been a bizarre one for technology stocks.

The industry was overwhelmed by a relentless geopolitical circus that had more sway on tech stock’s price action than in any year that I can remember.

Technology stocks have never been more intertwined with politics.

The so-called FANGs have really been taken out behind the woodshed and beaten, and their get-out-of-jail card is no longer free to access with politicians eyeing them as take down targets.

They are no longer invincible even if they still earn bucket loads of money.

A good amount of the public animosity towards the big tech companies has been directed to socially awkward CEO of Facebook Mark Zuckerberg and his negligence towards the concept of personal data.

Facebook was once the best company in technology to work, I can tell you now that prospective applicants are scrutinizing Facebook’s actions with a gimlet eye and turning to other opportunities.

Current Facebook employees are putting in feelers out to former colleagues planning optimal exit strategies.

Remember that it’s not my job to always tell you which tech stocks are going up, but also to tell you which tech stocks are going down.

One stock poised to outperform in 2019 is international FinTech company PayPal (PYPL).

The stock has proven to be Teflon-like deflecting the pronounced volatility that has soured the tech sector in the second half of the year.

The pendulum of regulation-flipping will concoct new winners for 2019 and I believe PayPal is one of them.

PayPal is in a dominant market position with a core customer base of 254 million users and growing.

The company is so dominant that it processes almost 30% of all global payments excluding China where foreign companies are barred from operating in the FinTech space.

The quality of the product is demonstrated by a recent note from research firm Nielsen offering data showing that on average, PayPal customers complete transactions 88.7% of the time.

This astoundingly high number for PayPal checkout conversion is about 60% better than “other digital wallets” and 82% better than “all payment types."

PayPal’s home country, United States, is still vastly unmonetized in terms of the breadth of penetration of online and e-commerce payments.

America has failed so far to adopt the amount of FinTech that Chinese consumers have rapidly embraced.

The great news is that late-stage adoption of FinTech services will offer PayPal a path to profits that bodes well for the earnings and its share price in 2019 and beyond.

Investors can expect total payment volumes (TPV) consistently nudging up in the mid-20% range.

The firm helmed by Dan Schulman is just scratching the surface on pricing power.

PayPal has changed its approach of ‘one‐size‐fits‐all’ in merchant contracts to a dynamic pricing model reflecting the value‐add of recently acquired products that are more powerful.

Jetlore, launched in 2014, is a provider of predictive artificial intelligence for retail companies able to comb through the data to help boost sales.

Hyperwallet distributes payments to those that sell online, and its purchase was centered around protecting the company's core business, enabling marketplaces to pay into PayPal accounts.

iZettle, an international mobile point-of-sale (POS) provider, is better known as the Square of Europe and has a large footprint. The relationship in PayPal has sounded alarm bells in Britain for being too dominant.

Simility, an AI-based fraud prevention specialist, round out a comprehensive list of new tools and services to PayPal’s all-star caliber lineup that can offer upgrades to businesses through a hybrid solution.

This positivity surrounding the sum of the parts will allow the company to build custom solutions for merchants of all sizes.

Augmenting a solid, stable business is a start-up inside of PayPal’s umbrella of assets with enormous growth potential called Venmo making up one of PayPal’s large future bets.

Venmo is a peer-to-peer payment app acquired by PayPal in 2013.

It is a favorite and mainstay of Millennial users who have gravitated towards this FinTech platform.

PayPal is intently focused on monetizing Venmo and the strategy is paying dividends with last quarter seeing 24% of Venmo traffic monetized which is up sequentially from 17% the quarter before.

Part of the increase in profits can be attributed to integrating Uber Eats into the platform, tacking on a charge for instant money transfers linked to bank accounts, and a Venmo debit card rolled out to the masses.

This innovation was not organic and in fact borrowed from FinTech Square, a great company led by Jack Dorsey, but the stock is incredibly volatile scaring off a certain class of investors.

Former CFO of Square Sarah Friar left her post at Square to boldly take on a CEO job at Nextdoor, a social network app, illustrating that an executive management job at Square is a golden credential able to springboard workers to a CEO job in Silicon Valley.

Shares of Square have doubled in 2018 and 2017, and the recent weakness in shares is more of a case that Square went too far over its skis than anything materially wrong with the company as well as a harsh macro climate that stung most of tech.

The price action can sometimes be breathtaking with 7% moves up and down all in a few days.

If you are searching for a slow grinder on the way up, then Microsoft (MSFT) would be a better tech play to plop your money into.

In my eyes, Microsoft is the most durable, all-terrain tech stock that will weather any type of gale-force squall in 2019.

For me, CEO of Microsoft Satya Nadella is the best CEO out there in the tech industry minus Jeff Bezos at Amazon (AMZN).

The Azure Cloud business is ferociously nipping at Amazon’s heels and Nadella has created a subscription-based monster out of legacy components left behind by failure Steve Ballmer who almost sunk Microsoft.

The stock has risen three-fold since Nadella took the reins, and I believe that Microsoft will soon surpass the trillion-dollar market capitalization level and end 2019 as the most valuable tech company.

Microsoft is indestructible because it’s a hybrid mashup of a growth company whose legacy products are also still delivering fused with a top-notch gaming division and a chance at catching the Amazon cloud.

The only company that can compare in terms of potency is Amazon.

Microsoft is not a one-trick pony like Apple, Facebook, Netflix and the way I see it, there are only two top companies in the tech landscape that will leave the last three companies I mentioned in the rear-view mirror.

Echoing Microsoft, PayPal has adopted a similar magical formula with its legacy core growing at 20% yet has growth levers with Venmo layered with targeted add-on companies that will enhance the firm’s offerings.

Moving forward, tech companies that have one or more growth drivers funded by a successful legacy base will become the ultimate tech stocks.

Playing on the same trope, Adobe (ADBE) is another company that has a software-based iron-clad legacy twinge to it and has the potential to spread its wings in 2019.

PayPal, Microsoft, and Adobe do not have the potential to double like Square or Roku next year, but they have minimal China trade war risk if things turn ugly, highly profitable with growing EPS, and are pure software companies whose CEOs put a massive emphasis on software development.

Expect this trio to melt up in 2019, and be prepared to strap on call spreads at advantageous entry points.

Another pure software service stock I love for 2019 is Twilio (TWLO) who I chronically use when I call an Uber to shuttle me around and take weekend getaways on Airbnb.

I would also lump Salesforce (CRM) into the discussion for stocks to buy in 2019 too.

Notice that all the stocks I favor next year are heavily weighted towards software and not hardware.

Hardware is going out of fashion at warp speed, the China tariffs just exacerbated this trend since most of the hardware supply chains are based in China.

Currently, the Mad Technology Letter has open positions in Microsoft and PayPal and if you are like most people online, you will probably use their service next year and more than a few times.

The John Thomas TV Interview Q&A

Diary, Newsletter

Mad Hedge Fund Trader John Thomas was interviewed on a major news network a few days ago talking out the state of the global financial markets. I thought you would be interested in the Q&A that followed.

Q: Bonds (TLT) have come down a lot on sudden flight to safety bid, with the 30-year yield under 2.9%. Do you see yields going back up in the short term?

A: Absolutely, yes. This is a one-time only panic triggered by the failure of the G-20 Summit in Buenos Aires. And we got the second leg down from the arrest of the CFO of Huawei, one of China's biggest companies, so that has triggered a short-term panic. It's temporary and we're going to bounce back strong. In fact, we already have. Now is a great time to be shorting bonds and buying stocks.

Q: How bad are things at Facebook (FB)? Is the bad news priced into the stock?

A: No, all the bad things are not priced into the stock. That’s why we are telling people that Facebook is a “No touch.” Bad news seems to come out every day, it’s a black swan a day stock, you don’t want to be anywhere near it. They will get some regulation, but nobody knows what it is, or how much it will affect profitability. But when a big company has to change their business model in a hurry, you don’t want to be anywhere near it. Far easier to buy it on the way up than on the way down.

Q: Will a cut in the oil supply by OPEC stem the spiraling down price of Oil (USO)? Is there a trade here?

A: “Yes” to both questions. OPEC will probably announce some sort of price cut/production cut in the next meeting which will get prices off the floor. Everyone ramped up their production to try to beat price falls which then makes the price fall worse, which is always what happens. So, yes, I would be buying oil here. I'd be buying oil stocks here too. There is your trade.

Q: Will the markets hold the February Lows?

A: Yes.

Q: If it does not hold, how far can it fall?

A: Worst case, you may get a fall straight down sucking all the sellers. But if you flip the algorithms to the buy side then it’s off the races. Markets have a habit of doing that quite a lot this year, so I think the lows have been made and you want to be buying stocks here. The fundamentals behind the market are just too strong to get beyond what algorithms are doing, what damage algorithms can do on a day trading basis. So yeah, I don't think that we're going to new lows, these are the new lows right here.

Q: Do you see an American Recession by the end of 2019?

A: Yes, I see the bull market ending in the next 3 to 6 months and recessions starting after that. That said, there is plenty to be made on the upside in coming months and then there's a ton of money to be made on the downside after that. That’s when you want to be attending my short selling school which you also get with a subscription to my service.

Q: Will the Chinese (FXI) allow the Yuan to collapse to fuel imports AND stimulate their GDP growth rate?

A: Yes. They have largely offset all of the import duties imposed by the US by depreciating their currency by 10%. If we raise duties more, they'll just cut their currency value by the same amount, so the actual dollar landed price is unchanged. There's nothing the US can do about that. We're already playing our best cards so it’s not like we can do to retaliate if they devalue their currency more. That’s the problem you have shooting all of your arrows on the first attack.

Q: Would you rotate some growth to value-based stocks on the expectation of interest rising next year in crush and grow stocks.

A: You got it half right. I would sell the high growth stocks into the next big rally, take my profits, and then go into cash! You don't want to own defensive stocks in bear markets, you want to own cash. Defensive stocks go down in a bear market, only at a slower rate, but go down they do nonetheless. Cash is king. You can earn 3 or 4% on your cash these days. That is much better than a stock that is going down.

Q: I bought General Electric (GE) about a year ago at $17, and I thought it was a great deal at the time. Unfortunately, it was not, so can (GE) go any lower than it is now? I thought it would hold $10 dollars but then they cut their dividend to one cent and the shares have cratered to seven dollars. What should I do?

A: You're kind of asking me what to do after you close the barn door and the horses have already bolted. If you have (GE), I would keep it at seven dollars. The worst thing, it goes sideways from here. The best case is you get a strong rally and the stock doubles in coming months. This is not a chapter 11 situation as they have too many assets. It’s just a matter of how quickly they can turn around the company. By the way, we told people to stay away from (GE) from $31 all the way down to when it got to single digits. So, we missed that buy every dip mentality in (GE). Thank goodness for that.

Q: Why won’t banks benefit in a rising interest rate environment?

A: The answer is very simple. These are the new buggy whip makers. You don't want to own big banks as they're hobbled by these gigantic branch networks which cost a fortune, and which are all going to disappear in ten years. Fintech companies like Square (SQ) and PayPal (PYPL), these little tiny apps that you've never heard of, they're eating the banks’ businesses one by one. And by the way, even though interest rates are rising, loan volume is falling at a faster rate, so they're making a lot less money than they used to. They're not really allowed to trade markets anymore because the risk is too high. So, even if they knew how to trade markets, they can’t rely on those earnings like they used to. So, avoid the banks like the plague.

Q: Is there any scenario you see stocks rising 10% next year?

A: No. Absolutely not. We're trying to call the top of a 10-year bull market here. The total return on the market in 2019 will probably be negative and could be negative by quite a lot. Maybe by 10%, 15%, or more. So yeah, if you're hanging on for new highs, I would give up that theory and find another one. It could be a very long wait, like a five-year wait before we go back to the old highs we saw in September and before that in January.

Q: Will Geopolitics drive the market more than it did in 2018?

A: Absolutely, it will. In the geopolitics category, you can include the China trade war, the Europe trade war, the possibility that Congress does not approve the new NAFTA. There's a ton of new things that could go wrong next year. And by the way, the burden of proof is now on stocks to prove how good they are. Risk is rising in the market and volatility is rising, but there still is good money to be made for a year-end rally.

Q: Why has gold (GLD) not performed so far?

A: We don't have inflation and gold really needs to get a good ramp up in inflation to get some serious price performance. That said, I expect a return in inflation. The economic data you get lags reality by anywhere from 3 to 6 months, so you will get a rise in inflation well above 3%. That’s when you really start to move on gold, that’s why I'm saying buy the dip.

Q: Would you buy the dollar (UUP)?

A: No, I would not. It’s looking like we have a couple of interest rates rising next year. The dollar will remain strong into that but in some point next year in the whole strong dollar story disappears as the rise in interest rates stops. If the interest rates level, all of the weak dollar plays will take off like a rocket. Those would include the Euro (FXE), Yen (FXY), and emerging markets (EEM). So, watch those spaces very carefully. There are gigantic moves coming in all of those once we stop raising interest rates and once the dollar peaks out.

Q: Will we close at the lows of the year?

A: No, we will not. The lows of the year probably happened right before this interview. I expect a strong rally from here driven by algorithms. Yes, they work on the upside just as well as they do on the downside side. In fact, algorithms really don’t care which way they go just as long as they go.

Q: What securities do you cover?

A: We cover stocks, bonds, commodities, precious metals, real estate, and every trade alert has a recommendation for a stock, an ETF, and an options trade so that way you can tailor the trade alert to meet your own experience level and risk tolerance.

Q: When does the letter come out?

A: It comes out roughly at midnight EST every day before the next trading day. That way early risers can read the letter and then enter their trade alerts at the market opening. It also helps the Europeans read it as their day starts. We have a big following in Europe and an even bigger following in Australia so that is the answer to that question.

Q: Can beginners with no previous experience use your service?

A: Absolutely. Training beginners how to enter the markets for the first time is one of the primary goals of this newsletter. We have customers that range in size from $20 billion dollar hedge funds all the way down to students trading off their dorm room beds with minimal one-contract trades. So yes, it’s for everybody and every trade alert that we send out has a link to a video showing you exactly how to execute this trade on your own trading platform

Q: Are you an algorithm?

A: Well, if I made a machine noise that would help. All I can say is come to one of my global strategy luncheons. You can pinch me and if I bleed, I am real.

Q: You obviously have enough money, why do you do this?

A: Leveling the playing field for the average guy is why I do this. When I worked on Wall Street, I saw so many people get ripped off it used to make me sick. So, this is my chance to get even. Helping you learn how to make money is my way of getting even. That's why I do this.

At the beginning of the interview, I promised you a seasonal trade alert, here is one of the most popular ones, Buy Home Depot (HD) in the Summer before the hurricane season. That’s good every year for a 15% rally and that’s exactly what we got this year. A 15% rally, 2 big hurricanes, big profits, goodbye, and then see you again next year.

Q: Thank you for coming today, John. It was a real pleasure.

December 6, 2018

Tech Letter

Mad Hedge Technology Letter
December 6, 2018
Fiat Lux

Featured Trade:

(A BIG ESCALATION OF THE TRADE WAR)
(INTU), (MSFT), (HUAWEI), (SQ), (ABDE)

A Big Escalation of the Trade War

Tech Letter

CFO of Huawei Meng Wanzhou was arrested transiting in Vancouver and is facing extradition to the United States to face the accusation that she violated sanctions against Iran.

This doesn’t help calm the nerves of tech investors. Not at all.

Wanzhou is the daughter of Founder and President of Huawei Ren Zhengfei who springboarded to success after his close ties to the People’s Liberation Army helped propel his career in technology when Shenzhen opened up its economy in the 1980s.

He has never looked back since then developing Huawei into one of the key cogs of the global telecommunications infrastructure.

Huawei’s rapid ascent has been the defacto Achilles heel between the United States and Chinese tech relations gone sour.

China is hell-bent on dominating 5G and beyond, and the Chinese communist views Huawei as a critical component to executing this vision.

That being said, there are plenty of tech stories out there that are worth a look irrespective of the macro headaches.

In a time like this, avoiding China-themed tech stocks would offset some volatility as shares have been on a rollercoaster because of issues unrelated to the companies themselves.

Software companies with income streams closely linked to domestic revenue is a trope that I have recommended and will outperform the pure tech growth stocks in 2019.

A company that epitomizes these traits is Intuit (INTU). The problem with it is that it is too expensive right now as well as having growth-related road bumps.

Intuit is a company your family tax accountant loves and hates.

It is a financial software taking care of financial, accounting, and tax preparation for small businesses, accountants, and individuals.

The company is headquartered in Mountain View, California.

The bulk of its revenues derive from operations within the United States and that is music to my ears right now in this climate.

Intuit also owns TurboTax which is one of the most popular domestic income tax preparation software packages in the United States.

Quickbooks Online, another type of accounting software owned by Intuit, is the firm’s bread and butter product and expanded over 40% YOY.

Even with this premium growth, the small business unit was only able to grow 11% YOY.

Quickbooks Online now has 3.6 million subscribers demonstrating the large scope of its business.

Through feast or famine, people will always need accounting and financial software even with a fractious global trade war threatening to topple global trade.

This software stock will provide stable earnings and reliable profits because of its defensive nature.

However, its 3-year revenue growth of 12% is not what premium tech companies produce. Intuit needs to ramp up its revenue drive and I believe the changing of CEO from old hand Brad Smith to his hand-picked successor Sasan Goodarzi will do the trick.

Goodarzi has indicated that he intends to migrate up the value chain into the mid-tier business revenue stream hoping to land some notable deals.

His immediate job is to identify a solution to help accelerate the firm’s top-line growth again.

The addressable market is massive, and Intuit isn’t capitalizing on its position with smaller companies, leaving the opportunity to upsell more advanced software to customers on the table.

The alarm bells should be ringing.

Intuit requires an upgrade in its software strategy in an evolve-or-die tech climate.

Nurturing small business customers is part and parcel to adopting a legitimate growth strategy as the status quo moving forward.

Weeding out one’s core customer base is a kamikaze mission.

If Intuit nails this transition, then new income streams will open up while retaining old customers.

That being said, Intuit is still a good company and could become a great company if they want to.

They even have a dividend yield of 0.8%.

Intuit is an incredibly profitable company and has increased their 3-year EPS growth rate to 27%, presiding over high-profit margins of 33%.

Financial products which include financial software are incredibly sticky and I would lump accounting software into that group too.

Accountants do not fancy switching over accounting software every year and risk fudging the numbers.

The company has made around $1 billion in profits the past three years and annual revenue has steadily climbed from $4.19 billion in 2015 to $5.96 billion in 2018.

Management indicated that 2019 revenue will come in around $6.5 to $6.6 billion, a jump of around 8-10%.

In my books, 8-10% of a company of this ilk isn’t good enough.

I am hoping new management will roll out the Microsoft (MSFT) playbook which focused on its subscription as a service (SaaS) revenue stream and reaped the untold rewards.

Intuit needs to wean itself from selling packaged products.

And the 11% growth in last season's earnings report was a pitiful deceleration from 17% the year before.

It is clear that management has not pumped enough juice out of this baby and fresh blood should invigorate management at the top level.

Highlighting the attractive possibilities to grow the existing user base is the uptick in self-employed subscribers within QuickBooks online surging to around 745,000 from 425,000 YOY.

Cross-selling to this existing subscriber base would increase average revenue per user.

On a sour note, strength isn’t happening across the board with the desktop ecosystem revenues of $537 million sliding 4% YOY.

Intuit isn’t harnessing the tools they currently possess.

Converting the critical customer feedback into actionable results will boost the company’s products and would be a big first step in making this a premier software company along the lines of Adobe (ADBE).

They have the foundation set up to achieve an Adobe-like revenue trajectory.

A revamp to the sorely lacking functionality will drive more revenue and keep customers happy as well as pulling in more mid-tier income streams.

I wouldn’t label Intuit a strong buy at this point and short-term macro weakness is a great reason to hold off on this stock before making the plunge.

Longer term, I pray that fintech newcomer Square (SQ) won’t expand into the individual accounting software industry because the rate of innovation percolating inside of Square’s office walls is second to none.

Tax software would be on the chopping block if Square can get its act together and make a beeline towards this segment.

Technology rewards the brute force innovators and Square wants to disrupt anything that involves digital finance.

I believe Intuit has good and not great software, but the lack of innovation could decimate them down the line once a serious innovator starts to eye their addressable market.

In any case, if Intuit becomes cheaper sliding to the $150-$160 levels from the $207 today, that would serve as a smart entry point into this above average software stock.

However, there are higher quality software companies out there, especially many whose revenue isn’t decelerating and some whose annual revenue is doubling every two years like Square.

November 30, 2018

Diary, Newsletter, Summary

Global Market Comments
November 30, 2018
Fiat Lux

Featured Trade:

(NOVEMBER 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(VXX), (VIX), (GE), (ROKU), (AAPL),
(MSFT), (SQ), (XLK), (SPLS), (EWZ), (EEM)

November 28 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader November 28 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.

Q: Is it time to get out of semiconductor stocks?

A: The time to get out is before it drops 60%, not afterwards. So, if you have semiconductor stocks, I would look for the next major rally to get out. I think we will get one of those rallies into December/January. We went negative on this sector in June, took all our profits, and didn’t go back in until last week.

Q: Is it time to buy semiconductor stocks?

A: No, that is the group you want to buy at the absolute bottom of the next recession which might be next year sometime. They lead on the downside, and they will lead on the upside as soon as they sniff a recovery in the economy.

Q: I held on to my position in Square (SQ). Should I sell now for a small profit?

A: Yes, in recessions, big companies prosper much more than small companies like Square; that’s why it had such a tremendous selloff; down 55% in six weeks. A small technology stock is not what you want to own in a recession. Big companies slow down, small ones die. At least that’s how conservative investors see it.

Q: What do you make of Fed comments this morning that asset prices are high?

A: I agree with them. They were certainly overpriced with a P/E multiple of 20 that we saw in September; they’re moderately priced now with a P/E multiple of 14.9. I think real estate markets are the overpriced assets that the Fed is talking about though, far more than the stock market, and markets like San Francisco, Seattle, and Vancouver are still way too high.

Q: What are your comments on Apple (AAPL)?

A: There’s an interesting thing going on here; you’ve just had a massive move out of hardware stocks like Apple, which basically makes phones and computers, into software stocks like Microsoft (MSFT), which is growing their cloud business like crazy. You may see this as a long-term industry trend, out of hardware stocks into software stocks. It’s all about the cloud now. The future is in software and that is where Apple is going to with services like the cloud, iTunes, streaming, and advertising, although they are doing it slowly.

Q: Will Trump be able to persuade Fed Chair Powell to stop hiking interest rates?

A: He will not, Powell is one of the few principled people in the government. He’s going to stick to his discipline, only look at the data, and that is going to require him to keep raising interest rates. One of the big black swans for 2019 may be that Trump fires Powell and gets a friendly rent-a-Fed chair in there who lowers interest rates on command. If Trump can hold on for nine months though, even Powell will see the economy’s in trouble and will have to respond accordingly by capping or even lowering interest rates.

Q: Why are you not stopping out of Roku (ROKU)?

A: We haven't yet approached our upper strike price on the December $30-$35 vertical bull call spread. That’s usually where I bail out; I like to give stocks plenty of room to do the right thing. Stocks have to breathe and I pick strike prices to compensate for that. Otherwise, you’d be stopping out of every trade immediately.

Q: Should we close the iPath S&P 500 VIX Short Term Futures ETN (VXX) trade or leave it open?

A: I’m looking for a bit more of a rally in stocks and a drop in the Volatility Index (VIX); then we’ll try to grab whatever additional couple of pennies we can get out of that.

Q: What do you think of Brazil (EWZ)?

A: Avoid emerging markets (EEM) as long as the U.S. is raising interest rates and the dollar is strong. Rising dollar means rising debt for emerging markets and less ability to service that debt, all bad for business.

Q: Morgan Stanley (MS) says “buy emerging markets”; are they nuts?

A: For the short term yes, for the multi-year long term they are a screaming buy. They are at historical lows in terms of valuation and already have a recession priced into them. But jumping in too soon could be painful.

Q: What are your expectations for the yield curve?

A: I expect all levels of the fixed income market to drop in price and rise in yield with the sharpest move in overnight rates. This eventually leads to a very steep inverted yield curve which causes recessions and bear markets.

Q: Thoughts on Master Limited Partnerships?

A: They could be relatively safe now that oil is at $50. There have been big selloffs recently. The yield on these are high and there is going to be big infrastructure building for energy going forward. I would say don’t put all your eggs in one basket and diversify your risk. In the Great Recession, many of these went bankrupt. I would look at the Alerian MLP (AMLP), which has fallen 15% in six weeks.

Q: Should I be rotating out of the Tech (XLK) stocks on rallies into more defensive stocks like Staples (SPLS)?

A: That’s half right. You should be rotating out of Tech stocks and rotating into cash which yields up to 2-3% these days. Nothing does well in a real bear market except cash. Defensive stocks still go down, just at a slower rate.

Q: Is General Electric (GE) good for the long term?

A: Yes, if anyone can turn around GE it’s the current management. That said, it could be a long-term slog—that’s why I had a long-term leap in this thing before it collapsed. It could turn around and still go up but these are throwaway, chapter eleven level type prices that we’re getting now. And now they are going to have to do a turnaround going into a recession.

Q: Do you see GE as good for a long-term trade?

A: Long term and trade don’t belong in the same sentence; but I’d say for a long-term investment at these levels, probably yes. It certainly is a bargain from $30 down to $7.40 in a year.

Q: Is this webinar archived?

A: A: Yes, they are always posted on the website within two hours of recording. Just go to www.madhedgefundtrader.com/, login and then hover your cursor over “MY ACCOUNT” click on “GLOBAL TRADING DISPATCH,” “Mad Hedge Technology Letter” or “Newsletter” depending on your membership then click on the Webinars button. The last ten years of webinars should show up, with the most recent one at the top.

Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

A Lesson in Blitzscaling

Tech Letter

One of the fastest parts of technology growing at a rapid clip is fintech.

Fintech has taken the world by storm threatening the traditional banks.

Companies such as Square (SQ) and PayPal (PYPL) are great bets to outlast these dinosaurs who have a laser-like focus on technology to move the digital dollars in an efficient and low-cost way.

Another section of the technology movement that has caught my eye morphing by the day is the online food delivery segment that has soaring operating margins aiding Uber on their quest to go public next year.

There have been whispers that Uber could garner a $120 billion valuation dwarfing Chinese tech giant Alibaba’s (BABA) IPO which was the biggest IPO to date at $25 billion.

Uber is following in Amazon’s footsteps executing the “blitzscaling” method to suppress competition.

This strategy involves scaling up as quick as possible and seizing market share before anyone can figure out what happened.

The growth explodes at such speed that investors pile in droves throwing inefficient capital at the business leading the company to make bold bets even though profit is nowhere to be seen.

Blitzscaling has fueled American and Chinese tech to the top of the global tech charts and the trade war is mainly about these two titans jousting for first and second place in a real-time blitzscale battle of epic proportion.

The audacious stabs at new businesses usually end up fizzling out, but the ones that do have the potential to blaze a trail to profitability.

One business that has Uber giving hope of one day returning capital to shareholders is Uber Eats – the online food delivery service.

Total sales of restaurant deliveries will hit 11% of revenue if the current trend continues in 2022 marking a giant shift in consumer attitudes.

No longer are people eating out at restaurants, according to data, younger generations view ordering from an online food delivery platform as a direct substitute.

This mindset is eerily similar to Millennials attitude towards entertainment.

For many, Netflix (NFLX) is considered a better option than attending a movie theatre, and all forms of outdoor entertainment are under direct attack from these online substitutes.

One firm on the forefront of this movement has been Domino’s Pizza (DPZ).

You’d be surprised to find out that over half of the Domino’s Pizza staff are software developers.

They have focused on the customer experience doubling down on their online platform to offer the easiest way to order a pizza.

In 2012, the company was frightened to death that it still took a 25-step process to order a pizza.

By 2016, Domino’s rolled out “zero-click ordering” offering 15 different ways to order their product across many major platforms including Amazon’s Alexa.

This has all led to 60% of sales coming from online and rising.

The consistency, efficiency, and seamless online payment process has all helped Dominoes stock rise over 800% since May 2012 and that is even with this recent brutal sell-off.

Uber is perfectly positioned to take advantage of this new generation of dining in.

In the third quarter, Uber booked $2.1 billion of gross booking volume in their powerful online food delivery service.

The 150% YOY rise makes Uber Eats a force to be reckoned with.

Uber’s investment into e-scooters and bike transportation stems from the potential synergies of online food delivery efficiency.

It’s cheaper to deliver pizzas on a bicycle or anything without an internal combustion engine.

If you ever go to China, the electric powered three-wheel modified tuk-tuk with a storage compartment in the back instead of passenger seating is pervasive.

Often navigating around narrow alleyways is inefficient for a four-wheel automobile, and as Uber sets its sights on being the go-to last mile deliverer of food and whatnot, building out this vibrant transport network is vital to its long-term vision.

In fact, Uber is not an online ride-sharing platform, it will be something grander and its Uber elevate division could showcase Uber’s adaptability by making air transport cheap for the masses.

As soon as the robo-taxi industry gathers steam, Uber will ditch human drivers for self-driving technology saving billions in labor costs.

As it stands, Uber keeps cutting the incentive to drive for them with rates falling to as low as an average of $10 per hour now.

The golden age of being an Uber driver is long gone.

Uber is merely gathering enough data to prepare for the mass roll-out of automated cars that will shuttle passengers from point A to B.

It doesn’t matter that Lyft has gained market share from Uber. Lyft’s market share was in the teens a few years ago and has rocketed to 31% taking advantage of management problems over at Uber to wriggle its way to relevancy.

It does not reveal how poor of a company Uber is, but it demonstrates that Uber’s network is spread over different industries and the sum of the parts is a lot greater than Lyft can fathom.

Lyft is a pure ride-share company and brings in annual revenue that is 4 times less than Uber.

Naturally, Uber loses a lot more money than Lyft because they have so many irons in the fire.

But even a single iron could be a unicorn in its own right.

CEO Dara Khosrowshahi recently talked about its Uber Eats division in glowing terms and emphasized that over 70% of the American population will have access to Uber Eats by the end of next year.

Uber’s position in the American economy as a pure next-generation tech business reverberates with its investors causing Khosrowshahi to brazenly admit that Uber “suffers from having too much opportunity as a company.”

Ultimately, the amped-up growth of the food delivery unit feeds back into its ride-sharing division. These types of synergies from Uber’s massive network effect is what management desires and dovetails nicely together.

In 2018 alone, 40% of Uber Eat’s customers were first-time samplers.

A good portion of these customers have never tried Uber’s ride-sharing service and when they travel for business or leisure, they later adopt the ride-sharing platform leading to more Uber converts.

Uber Freight has enabled truckers to push a button and book a load at an upfront price revolutionizing the process.

The online food delivery service is the place to be right now and it would be worth your while to look at GrubHub (GRUB).

Quarterly sales are growing over 50% and quarterly EPS growth was 61% sequentially for this industry leader.

Profit Margins are in the mid-20% convincingly proving that the food delivery industry will not be relying on razor-thin margins.

Charging diners $5 for delivery and taking a cut from the restaurateurs have been a winning strategy that will resonate further as more diners choose to munch in the cozy confines of their house.

Blitzscaling has led Uber to the online food delivery business and they are pouring resources into it to juice up profits before they go public next year.

The ride-sharing business is a loss-making enterprise as of now, and Uber will need to exhibit additional ingenuity to leverage the existing network to find strong pockets of revenue.

I believe they have the talent on their books to achieve finding these strong pockets making this company an intriguing stock to buy in 2019.

November 19, 2018

Diary, Newsletter, Summary

Global Market Comments
November 19, 2018
Fiat Lux

Featured Trade:

(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or MASS EVACUATION)
(SPY), (WMT), (NVDA), (EEM), (FCX), (AMZN), (AAPL), (FCX), (USO), (TLT), (TSLA), (CRM), (SQ)

The Market Outlook for the Week Ahead, or Mass Evacuation

Diary, Newsletter

I will be evacuating the City of San Francisco upon the completion of this newsletter.

The smoke from the wildfires has rendered the air here so thick that it has become unbreathable. It reminds me of the smog in Los Angeles I endured during the 1960s before all the environmental regulation kicked in. All Bay Area schools are now closed and anyone who gets out of town will do so.

There has been a mass evacuation going on of a different sort and that has been investors fleeing the stock market. Twice last week we saw major swoons, one for 900 points and another for 600. Look at your daily bar chart for the year and the bars are tiny until October when they suddenly become huge. It’s really quite impressive.

Concerns for stocks are mounting everywhere. Big chunks of the economy are already in recession, including autos, real estate, semiconductors, agricultural, and banking. The FANGs provided the sole support in the market….until they didn’t. Most are down 30% from their tops, or more.

In fact, the charts show that we may have forged an inverse head and shoulders for the (SPY) last week, presaging greater gains in the weeks ahead.

The timeframe for the post-midterm election yearend rally is getting shorter by the day. What’s the worst case scenario? That we get a sideways range trade instead which, by the way, we are perfectly positioned to capture with our model trading portfolio.

There are a lot of hopes hanging on the November 29 G-20 Summit which could hatch a surprise China trade deal when the leaders of the two great countries meet. Daily leaks are hitting the markets that something might be in the works. In the old days, I used to attend every one of these until they got boring.

You’ll know when a deal is about to get done with China when hardline trade advisor Peter Navarro suddenly and out of the blue gets fired. That would be worth 1,000 Dow points alone.

It was a week when the good were punished and the bad were taken out and shot. Wal-Mart (WMT) saw a 4% hickey after a fabulous earnings report. NVIDIA (NVDA) was drawn and quartered with a 20% plunge after they disappointed only slightly because their crypto mining business fell off, thanks to the Bitcoin crash.

Apple (AAPL) fell $39 from its October highs, on a report that demand for facial recognition chips is fading, evaporating $170 billion in market capitalization. Some technology stocks have fallen so much they already have the next recession baked in the price. That makes them a steal at present levels for long term players.

The US dollar surged to an 18-month high. Look for more gains with interest rates hikes continuing unabated. Avoid emerging markets (EEM) and commodities (FCX) like the plague.

After a two-year search, Amazon (AMZN) picked New York and Virginia for HQ 2 and 3 in a prelude to the breakup of the once trillion-dollar company. The stock held up well in the wake of another administration antitrust attack.

Oil crashed too, hitting a lowly $55 a barrel, on oversupply concerns. What else would you expect with China slowing down, the world’s largest marginal new buyer of Texas tea? Are all these crashes telling us we are already in a recession or is it just the Fed’s shrinkage of the money supply?

The British government seemed on the verge of collapse over a Brexit battle taking the stuffing out of the pound. A new election could be imminent. I never thought Brexit would happen. It would mean Britain committing economic suicide.

US Retails Sales soared in October, up a red hot 0.8% versus 0.5% expected, proving that the main economy remains strong. Don’t tell the stock market or oil which think we are already in recession.

My year-to-date performance rocketed to a new all-time high of +33.71%, and my trailing one-year return stands at 35.89%. November so far stands at +4.08%. And this is against a Dow Average that is up a miniscule 2.41% so far in 2018.

My nine-year return ballooned to 310.18%. The average annualized return stands at 34.46%. 2018 is turning into a perfect trading year for me, as I’m sure it is for you.

I used every stock market meltdown to add aggressively to my December long positions, betting that share prices go up, sideways, or down small by then.

The new names I picked up this week include Amazon (AMZN), Apple (AAPL), Salesforce (CRM), NVIDIA (NVDA), Square (SQ), and a short position in Tesla (TSLA). I also doubled up my short position in the United States US Treasury Bond Fund (TLT).

I caught the absolute bottom after the October meltdown. Will lightning strike twice in the same place? One can only hope. One hedge fund friend said I was up so much this year it would be stupid NOT to bet big now.

The Mad Hedge Technology Letter is really shooting the lights out the month, up 8.63%. It picked up Salesforce (CRM), NVIDIA (NVDA), Square (SQ), and Apple (AAPL) last week, all right at market bottoms.

The coming week will be all about October housing data which everyone is expecting to be weak.

Monday, November 19 at 10:00 EST, the Home Builders Index will be out. Will the rot continue? I’ll be condo shopping in Reno this weekend to see how much of the next recession is already priced in.

On Tuesday, November 20 at 8:30 AM, October Housing Starts and Building Permits are released.

On Wednesday, November 21 at 10:00 AM, October Existing Home Sales are published.

At 10:30 AM, the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.

Thursday, November 22, all market will be closed for Thanksgiving Day.

On Friday, November 23, the stock market will be open only for a half day, closing at 1:00 PM EST. Second string trading will be desultory, and low volume.

The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I'd be roaming the High Sierras along the Eastern shore of Lake Tahoe looking for a couple of good Christmas trees to chop down. I have two US Forest Service permits in hand at $10 each, so everything will be legit.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader