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Tag Archive for: (TSLA)

Mad Hedge Fund Trader

Will NIO Eat Tesla's Lunch

Tech Letter

The death of Tesla.

There is a sudden existential threat for one of the transformational American companies of the century created by Elon Musk.

And you can thank China for it.

If you didn’t know it, there are over 500 electric vehicle (EV) firms in China and the most widely known is NIO Inc.

NIO’s production chain spans just 20% the size of Tesla and has only delivered just a few thousand cars to this point.

Part of the reasoning for Tesla’s Musk to roll out a cheaper version of the Model 3 sedan was in reaction to the potential pipeline of China manufactured EV cars coming online.

The mushrooming of the electric car industry in China could be a death knell for Tesla.

Not only is the company battling stand-alone Chinese companies now for market share, but they will need to overcome the support of the Chinese communist party and the unlimited funds they throw at these types of national initiatives through generous subsidies.

As we speak, the communist party is starting to consolidate the national automotive industry and China’s National Development and Reform Commission will pour resources into the certain firms they believe can become national EV champions.

As it stands, China's sold more than 1 million electric vehicles in 2018 and could sell 2 million EVs by 2020.

And by 2030, China could dominate the global EV market by snatching 50% of the market.

I believe Tesla has absolutely zero future in China because of the explicit fact they are not a Chinese company and at this stage of the game, China and its home-grown tech are comfortable enough to stand behind the quality of their tech no matter how they acquire the secrets.

In fact, NIO Inc. produced an EV car that is above average quality and will improve with each iteration.

Headaches have already started to compile for Tesla as well when 1,171 Model 3 sedans arrived at industrial city Tianjin and were duly blocked with customs unhappy with the sticker labeling.

This nitpicking is a warning sign for things to come and Tesla will be hard-pressed to become what Apple was in China before Chinese consumers stopped buying iPhones. Or it may be just another iteration of the trade war, now a year old.

Don’t forget that US imported automobiles are exposed to high 100% customs duties that were infamously present even before the trade war began.

A Tesla factory in Shanghai is in the works with the $2 billion loan coming from a state-owned Chinese bank which vanishes any in-house knowhow Tesla planned to keep under wraps.

American high-end products will have to take on a bevy of domestic competitors, even some that possess borrowed foreign technology.

Along with the headwinds of battling state subsidies, Tesla will have to grapple with the price points at which Chinese EV companies sell their cars.

NIO’s ES6 is the follow up to the first all-electric SUV called the ES8 and deliveries start in June.

The car will go on sale for 358,000 RMB, or about $51,000, and that’s before government subsidies.

The 70kWh battery pack offers 254 miles of range and mimics Tesla features with an 11.3-inch touchscreen.

And if you thought Tesla could absorb the heavy blow from a $51,000 price point before government subsidies, then there is burgeoning EV firm Xpeng that crashes the price points even further.

The founder of Xpeng, Henry Xia, has conceded publicly that he was deeply influenced by Tesla and admitted his company was open-sourcing their patents.

The Xpeng G3 starts at 227,800 RMB, equivalent to less than $33,000, once again, before any government subsidies.

The product copies Tesla-style touchscreen features on the dashboard and has battery range capabilities of around 230 miles.

And here is the game changer, the effect of government subsidies could crater the price of these two types of Chinese EV cars to less than $9,000 for the consumer.

Game over for Tesla.

I surmise that once these Chinese EV cars cross the threshold of quality that puts the Chinese variant close to 75% as good as Tesla’s version, potential customers will flock to cheaper Chinese EV firms will a deluge of mass orders.

The global EV industry is the next high-tech industry to get hijacked from the Americans by the industrious Chinese who collaborate with state financial power to take down foreign competition.

Tesla, its leader Elon Musk, and every other high-end German car company are facing down a barrel of a gun that will prove to be an existential crisis of epic proportions.

This is all part and parcel of China’s plan to reshape the global export value chain.

China’s response is to crash the price of EV’s and use state support to outlast external competitors.

Equally as important, China has a massive shortage of EV infrastructure posing problems for Tesla cars to charge up outside.

This could be the trick up the sleeve of Beijing, they could easily squeeze Tesla out of the mix by allowing only home-grown EV cars to charge up at public charging stations citing security concerns of American technology.

The effect would be that Tesla owners would only be able to fill up in the confines of their own house which is problematic since most urban Chinese who can afford Teslas live in skyrise apartments without a personal garage.

The Middle Kingdom is also facing an ecological crisis at home and an exaggerated migration to EV cars is the state’s solution to cleaning up the domestic environment.

The long-term vision appears to have no place for Tesla in the Chinese economy – they already have their own Tesla’s and more imitations in the pipeline hoping to crash the price points even further.

Even more frustrating, 2020 or 2021 is the timeline to get Tesla production up and running in Shanghai, but by then, Tesla and Musk might be fighting from a position of weakness.

 

 

XPENG G3 FOR LESS THAN $33,000

https://www.madhedgefundtrader.com/wp-content/uploads/2019/03/xpeng.png 522 800 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-03-07 02:06:152019-03-07 01:41:52Will NIO Eat Tesla's Lunch
Mad Hedge Fund Trader

March 6, 2019

Diary, Newsletter, Summary

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)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-03-06 01:08:582019-03-05 14:52:08March 6, 2019
Mad Hedge Fund Trader

February 27, 2019

Tech Letter

Mad Hedge Technology Letter
February 27, 2019
Fiat Lux

Featured Trade:

(HOW AUTONOMOUS DRIVING WILL CHANGE THE WORLD),
(TSLA), (GM), (GOOGL)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-02-27 02:07:402019-07-09 12:10:41February 27, 2019
Mad Hedge Fund Trader

How Autonomous Driving Will Change the World

Tech Letter

The car insurance industry will grapple with a massive existential crisis of epic proportions unless they evolve.

The looming threat is caused by technology and autonomous driving.

This is why parents usher their children into industries that won’t be blown up by technological disruption.

Removing the driver from the automobile industry could be the single most societal shift in our lifetimes.

This technology is getting ramped up as we speak and Waymo is the clear leader that is already collecting money for commercial rides in the state of Arizona.

Car insurers must wonder if they will be able to charge the same amount if there are no drivers?

The answer is that the liability will head from the driver to the manufacturer with companies like General Motors (GM) Tesla (TSLA) likely footing the bill while the passenger is likely to pay minimally.

We are headed towards another data war with insurers incentivized to dismiss the relevance of data in self-driving cars and devaluing it will cause the car companies’ bills to go higher.

Car insurance companies are also heavily investing in data analytics teams to see which part of the pie and how big of it they can get from self-driving technology.

This is uncharted territory.

Consensus has it that by 2035, 23 million autonomous vehicles or around 10 percent of today’s total will grace our roads and highways.

But I believe this number is understating the underlying series of generational factors at play.

It’s no secret that the majority of Millennials and Generation Z want to live in coastal urban cores participating in the heart of downtown activities mainly because of the chance to find a high-paying job.

This has exacerbated the migration from rural to metro areas around the country and sapping the need to drive or buy a car when Uber can become an almost perfect substitute.

And don’t forget that according to the latest data, cars are stationary 92% of the time signaling consumers’ intentions to stop purchasing and instead rent cars by the minute, hour, and day.

That is the beauty of the sharing economy and how self-driving cars will fit in.

This avant-garde model will emerge between 2035 and 2050 effectively reducing the value of owning a car, the self-driving car that will be bought, probably by the self-driving tech company itself, could constitute 50% of all vehicles sold globally.

The sum of the parts could mushroom into a $3 trillion addressable market, not only made up of the physical cars but the assortment of ancillary technology needed to fuel these cutting-edge machines.

Alphabet’s (GOOGL) self-driving unit named Waymo run an onboard computer that processes images in real time using its machine learnings algorithm built by the industries’ best machine learning engineers.

However, not only do these firms need an army of artificial intelligence engineers to build the algorithms that are at the fulcrum of what they do, they also need other parts that fit into the puzzle such as lidar radar technology.

Lidar is an acronym for light detection and ranging, and the physical manifestation of this technology has so far been a cone-shaped object on top of the car's roof emitting laser pulses that bounce off objects allowing the car to recreate a 3D image of its surroundings.

The advancement of this technology and the potential production of scale will cut the cost of manufacturing this technology to less than $10 per sensor.

A full-blown lidar unit costs $75,000 at current market prices, but luckily the phenomenon of deflationary technology always drives the prices down to bare bones. 

Cameras, sensors, cooling systems, and GPU chips are other products that must be heavily developed to accommodate self-driving technology.

GM is another prominent player in this field, and they have already outfitted close to 200 cars for testing.

The firm transformed its Orion Assembly plant in Michigan to accommodate cameras, lidar, and other sensors to its Chevrolet Bolt.

Whoever masters the lidar technology the quickest will have an inside edge to grab market share once this industry explodes and a lower insurance bill.

Waymo won’t be the only player usurping market share even though they are the brightest name out there, and there is room for others to crash the party.

GM invested $500 million into Lyft which could act as a gateway path into outfitting Lyft cars with GM’s proprietary technology.

Whoever specializes in the art of licensing self-driving technology to companies will ring in the register as well and the opportunities abroad are endless because emerging economies aren’t players in this industry.

GM’s Cruise AV has opened eyes with GM removing pedals or a steering wheel for this electric car.

It’s under testing in select cities and GM plans to integrate it into its ride-sharing program.

Investors are still waiting for companies to telegraph meaningful revenue to the top line, and this teething phase could cause the impatient to bolt for greener pastures.

Waymo has claimed it will be able to deliver up to 1 million trips per day by 2022 signaling that real top line revenue appears a few years off at the earliest.

This trade isn’t for the smash-and-grab type, but this is the future and it will be a slow crawl to broad-based adoption and material revenue.

The death of the car insurance industry is still years away and insurers still have time to save their bacon.

Data at the Association for Safe International Road Travel (ASIRT) shows that nearly 1.25 million people die in road crashes each year, on average 3,287 deaths a day and another 20-50 million are injured or disabled.

Technology is on the move and will try to correct this awful trend in road safety and human fatalities.

These years could be the high-water mark for car insurance and as self-driving technology continues to seep deeper into the public consciousness, it could snatch revenue from the coffers of the insurance companies.

But if these legacy companies become nimble and embrace the changes, they could potentially be at the vanguard of a highly lucrative industry charging the likes of GM and Tesla to ferry around humans.

 

 

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-02-27 02:06:232019-07-09 12:10:47How Autonomous Driving Will Change the World
Mad Hedge Fund Trader

February 11, 2019

Diary, Newsletter, Summary

Global Market Comments
February 11, 2019
Fiat Lux

Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or DON’T STAND NEXT TO THE DUMMY),
(AAPL), (MSFT), (TSLA), (VIX), (TLT), (TBT), (FXI)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-02-11 01:07:262019-02-11 00:05:56February 11, 2019
Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Don't Stand Next to the Dummy

Diary, Newsletter

When I was a war correspondent (Cambodia, Laos, Iraq, Kuwait, Indonesia), my seniors gave me a sage piece of advice that saved my life many times.

“Don’t stand next to the dummy.”

Don’t go near the guy wearing the Hawaiian shirt, NY Yankees baseball cap, and aviator sunglasses. You want to be dressed in the same color as the troops and blend in as much as possible. Otherwise, the enemy will aim at the dummy and hit you.

As much as I tried, at 6’4” I was never going to blend in anywhere in Asia. So, I went into the stock market instead.

Now 50 years later, I am facing another dummy problem. Except that the next hit I may take will be of the financial kind rather than the metallic one.

The reaction to the Trump tax cuts is going to be far worse than any benefits the privileged class was able to reap from the cuts in the first place. Listening to the proposals aired, I shudder: A maximum 70% tax rate, the end of special estate tax treatment, a millionaire’s surtax, and the banning of corporate share buybacks.

It’s that last one that that will be particularly damaging for the US economy. Often, a company’s best possible investment is in its own shares where returns are frequently higher than possible through investing in their own business. Just think of all those shares Apple (AAPL) bought at $25, now at $170,  and Microsoft (MSFT) picked up at $10.

This is one of the only occasions were management and shareholder interests are one and the same. The event is tax-free as long as you don’t sell your shares. And companies don’t have to pay dividends on stock they have retired, boosting profits even further.

The media loves pandering to the most extreme views out there. I know because I used to do it myself. Cooler heads will almost certainly prevail when the tax code is completely rewritten again in two years. Still, one has to worry.

The week had plenty for we analysts and strategists to chew on.

Is the Fed pausing because of political pressure or an economy that is falling apart? Neither answer is good for equity holders. Start cutting back risk while you can. There are lots of bids on the way up, but none on the way down as December showed.

There has lately been a rising tide of weak data to confirm the negative view.

Factory orders nosedived 0.6% in November, the worst in a year. Funny how nobody wants to make stuff ahead of a recession. ISM Non-Manufacturing Index Cratered to 56.7. Should we be worried? Hell, yes! Why are we getting so many negative data points and stocks keep rising?

Farm sector bankruptcies are soaring, hitting a decade high. Apparently, the trade wars and global warming aren’t working for them. Ironically, ag prices are about to take off to the upside when a Chinese trade deal gets done. Buy the ags for a trade.

Tesla (TSLA) cut prices again in a blatant bid for market share and global domination. The low-end Tesla 3 price drops to $42,900. Next stop $35,000. Too bad they laid off my customer support personnel to cut costs. I can’t find my AM radio.

China trade talks (FXI) hit the skids, taking the stock market down with it as an administration official concedes they are “nowhere close to a deal” with the deadline 3 weeks off. Trump desperately needs a deal while the Chinese don’t, who think they can do better under the next president. If you disagree with this view in China, your organs get harvested and sold on the open market.

The European economy is also going down the drain with the EC’s forecast of economic growth cut from 1.9% to 1.3%. The US-China trade war is cited as a major factor. The global synchronizes slowdown accelerates. Looks like they’ll have more time to drink cheap wine and smoke Gauloises.

The Volatility Index (VIX) hit $15 and that seems to be the bottom for the time being. The market was more overbought than at any time since July. Is the “fear gauge” signaling that happy days are here again? I doubt it. Don’t whistle past the graveyard.

The Mad Hedge Market Timing Index is entering danger territory with a reading of 67 for the first time in five months. Better start taking profits on those aggressive leveraged longs you bought in early January. Your best performers are about to take a big hit. The market has since sold off 500 points, proving its value.

There wasn’t much to do in the market this week, given that I am trying to wind my portfolio down to 100% cash as the market peaks.

I stopped out of my short portion in Apple when my stop loss was triggered by pennies. The second I was out, it began a $6 selloff. Welcome to show business.

I used a major 3 ½ point rally in the bond market to put on a new double short position there. The yield on the ten-year US Treasury bond has to plunge to 2.40% in a month, a three-year low, for me to lose money on this position. It’s a bet that I am happy to make.

My 2019 year to date return leveled out at +10.03%, boosting my trailing one-year return back up to +35.75%. 
 
My nine-year return maintained +310.17%, a new high. The average annualized return stabilized at +33.83%. 

I am now 70% in cash and triple short the bond market.

Government data is finally starting to trickle out now that the government shutdown is over.

On Monday, February 11 there is nothing of note to report. Everything important is delayed.

On Tuesday, February 12, 10:00 AM EST, we get the January NFIB Small Business Index. Earnings for Activision Blizzard (ATVI) are out and should be a complete disaster, along with Twilio (TWLO).

On Wednesday, February 13 at 8:30 AM EST, the all-important January  Consumer Price Index is published. Barrick Gold (GOLD) reports.

Thursday, February 14 at 8:30 AM EST, we get Weekly Jobless Claims. We also get December Retail Sales which should be good.

On Friday, February 15, at 8:30 AM EST, the February Empire State Index is out. The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I will be battling my way through the raging snowstorms of the High Sierras trying to get over Donner Pass to my Lake Tahoe estate. Unless I clear the six feet of snow off the roof soon, or the house will get crushed from the weight as it did three years ago.

Where are all those illegal immigrants hanging out in front of 7-Eleven now that I need them?

Good luck and good trading.

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

 

 

 

 

 

 

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-02-11 01:06:222019-07-09 04:08:15The Market Outlook for the Week Ahead, or Don't Stand Next to the Dummy
Mad Hedge Fund Trader

January 24, 2019

Diary, Newsletter, Summary

Global Market Comments
January 25, 2019
Fiat Lux

Featured Trade:
(JANUARY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (EDIT), (NTLA), (CRSP), (SJB), (TLT), (FXB), (GLD),
(THE PRICE OF STARDOM AT DAVOS)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-01-25 08:08:382019-01-25 08:16:30January 24, 2019
Mad Hedge Fund Trader

January 23 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 23 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Would you buy Tesla (TSLA) right now?

A: It’s tempting; I’m waiting to see if we take a run at the $250-$260 level that we saw at last October’s low. If so, it’s a screaming buy. Tesla is one of a handful of stocks that have a shot at rising tenfold in the next ten years.

Q: CRISPR stocks are getting killed. I know you like the science—do you have a bottom call?

A: What impacted CRISPR stocks was the genetic engineering done on unborn twins in China that completely freaked out the entire industry and killed all the stocks. That being said, CRISPR has a great long-term future. They will either become ten-baggers or get taken over by major drug companies. The first major CRISPR generated cure will take place for childhood blindness later this year. The ones you want to own are Editas (EDIT), Intellia Therapeutics (NTLA), and CRISPR Therapeutics (CRSP).

Q: Do you ever reposition a trade and add contracts?

A: I very rarely double up. I’d rather go on to a new trade with different strike prices. A bad double up can turn a small loss into a big one. Sometimes I will do a “roll down,” or buy back one spread for a loss to earn back that loss with a spread farther in-the-money.

Q: For us newbies, can you please explain your trading philosophy regarding purchasing deep in the money call spreads and how that translates to risk management?

A: I did a research piece in Global Trading Dispatch yesterday on deep in-the-money call spreads, and today on deep-in-the-money put spreads. The idea is to have a position where you make money whether the market goes up, down, or sideways. Your risk is defined, and you always have time decay working for you, writing you a check every day. Here are the links: Vertical Bull Call Spread and Vertical Bear Put Spread.

Q: What’s the risk reward of floating rate corporate debts?

A: Number one: interest rates go down—if we go into recession, rates will fall. That wipes out the principal value of the security. Number two: with corporate debts, you run the risk of the corporation going bankrupt or having their business severely impacted in the next recession and their credit rating cut. It’s far safer to invest in a bank deposits yielding 2-2.5% right now. Some smaller banks are offering certificates of deposit with 4% yields.

Q: What are your thoughts on the British pound (FXB)?

A: I think Brexit will fail eventually and the pound will increase 25%; so play from the long side on the (FXB). It would be economic suicide for Britain to leave the EC and eventually people there will figure this out. If the Brexit vote were held today, it would lose and that may be how they eventually get out of this.

Q: Is it a bear market for bonds (TLT)?

A: Yes, it’s back on again. I expect we will visit $112 in the (TLT) sometime this year, down from the current $121. That brings us back up to the 3.25% yield on the ten-year US Treasury bond. That is down nine points from here, so it’s certainly worth taking a bite out of.

Q: What’s the best time to buy the ProShares Short High Yield (SJB)?

A: At the top of the next equity market run. It rose a whopping 10% during the December stock market meltdown so that gives you a taste of what can happen. Junk bonds are called “junk” for a reason.

Q: How do you see gold (GLD)?

A: Take profits now and buy back on the next dip. If we dip 5%-10% in gold, that would be a good entry point for a larger move later on in the year. To get a real move in gold, we need to see real inflation and that will eventually come. Another stock market crash will also gain you another 10% in gold.

Q: When will the government shutdown end?

A: I think it will go a lot longer than anyone realizes because Trump needs a deal worse than the Democrats do. Trump is basically saying pay for my wall or I’ll keep shooting another of MY supporters in the head every day. The Democrats can wait a really long time in that circumstance. Trump’s standing in the polls has also collapsed to new lows. By the way, the Chinese are using the same approach in the trade talks so that could be a long wait as well.

Q: There’s been a big shift in the MHFT Profit Predictor in the last 30 days—does this mean we should not be adding any positions?

A: Absolutely; this is a terrible place to be adding any new positions. The index went from 2 to 57 which shows you how valuable it is at calling market bottoms. Now we are at the top end of the middle of the range. All markets are now dead in the middle of very wide trading ranges which means the best thing you can do is take profits on existing positions, which I have been doing. Or watch Duck Dynasty and Pawn Stars replays. As for me, I am an Antiques Roadshow guy.

Q: What percentage should you be invested in the market now?

A: I’ve gone from 60% to 30% and have only 3 weeks left on my remaining position. I’m looking to go 100% cash as long as we’re stuck in the middle of this range. Better to sit on your hands than chase a high risk/low return trade.

Did I mention that we have had the best start to a New Year in a decade?

 

 

 

 

https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/John-Thomas-1.png 499 358 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-01-25 08:07:082019-07-09 04:41:40January 23 Biweekly Strategy Webinar Q&A
Mad Hedge Fund Trader

January 22, 2019

Tech Letter

Mad Hedge Technology Letter
January 22, 2019
Fiat Lux

Featured Trade:

(HOW TO PLAY TECHNOLOGY STOCKS IN 2019),
(NFLX), (AAPL), (TSLA), (STT), (BLK)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-01-22 01:07:212019-07-09 04:56:17January 22, 2019
Mad Hedge Fund Trader

How to Play Technology Stocks in 2019

Tech Letter

In the past week, the tech sector has received information allowing investors to sketch a concise roadmap of what to expect in the tech sector for the rest of 2019.

One – the bull story in technology isn’t dead and the December sell-off in tech growth stocks was overdone.

Two – the path to tech profits is filled with more booby traps than in year’s past.

Three – the migration to digital is becoming more pronounced by the millisecond.

If you go back about a month ago when tech stocks were at their trough, traders were pricing in about a 60% chance of a recession in 2019 or early 2020 and the data didn’t support it.

What people were confusing themselves with was slowing growth instead of a lack of growth.

Then we got the disastrous news from Apple (AAPL) indicating business in China was petering out forcing them to change tactics cutting iPhone prices.

The tech market went into full-on panic mode and the revelation of weak China data did not help either.

Netflix (NFLX) reported and the online streaming app offered some respite with outperforming growth numbers.

Netflix has been a favorite of the Mad Hedge Technology Letter since its inception but the caveat with Founder and CEO of Netflix Reed Hastings brainchild is that the extreme volatility makes it difficult to trade around on a short-term basis.

The stock is up 50% from its nadir and its growth story is solid and will perpetuate.

The next bastion of juiced-up growth for Netflix is the international audience and these numbers are examined closely with a fine-tooth comb by investors attempting to understand the direction of the company. 

The company audaciously added 8.8 million in new international subscribers last quarter which handily beat the 7.6 million estimates by 1.2 million.

Netflix also announced a few days earlier that it would raise the price of a monthly subscription between 13%-18%, and investors treated the news with celebratory shots of tequila.

It has been consensus for years that Netflix was severely underpricing their premium content, and analysts have been screaming and kicking trying to get Hastings to push up their monthly prices.

The price hike coincides with a year where I believe Netflix can grow revenue over 30%.

The mix of these two developments illuminate a few things about Netflix.

Netflix has the content that consumers want and even if competition rears its ugly head, they aren’t even in the same ballpark in terms of breadth and potency of content.

They are the king of contents and I don’t see anyone knocking them off their elevated perch in 2019.

In many ways, the Netflix long-term thesis mirrors the tech industry’s long-term thesis emphasizing supercharged growth by any means possible.

Even though this strategy is risky, it is working for Netflix and the capital isn’t drying up to go after the best content producers money can buy.

This earnings report should put to rest the growth warning sirens for now, tech will grow this year, but earnings results will be more of a mixed bag with the occasional miss.

This is in stark comparison to early 2018 where every tech company and their mother were scorching earnings forecasts by a magnitude of two or three.

Last September, the tech market looked above its head and saw a few boulders about to crush the herd, but investors shrugged it off.

As we move forward, the tech sector and the overall market is inching closer to a recession.

The low-hanging fruit has been pocketed and incremental gains aren’t no-brainers anymore – this can be gleaned from Tesla (TSLA) curtailing their workforce by 7%.

This news was delivered by a letter from CEO of Tesla Elon Musk noting that these decisions have been made with the goal of “increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months.”

Basically, Musk has telegraphed that staff needs to perform better, identify efficiencies that will save costs which in turn will boost profit margins.

This doesn’t mean that the era of tech growth is over, but this signals that tech companies are becoming more fidgety about loss-making operations and have ultimately targeted profits which shout at investors' late-cycle economics.

Musk needs to turn Tesla into a perennial profit machine to prove naysayers wrong, and now is the time to turn the page and max out his rocket fuel.

If the recession hits, investors could turn against Tesla and capital could dry up.

This newfound modesty towards the e-car business model is, in no doubt, exacerbated by the ratcheting up of fierce competition from the traditional automobile makers.

Tesla is in the e-car lead for battery technology, revolutionary production processes, and have a treasure trove of data that German companies would do anything to get their hands on.

Musk knows Tesla has fought this hard to get to this point, and he'd rather have the ball in his hands with 10 seconds left and a tie game just like Michael Jordan of the Chicago Bulls did.

Shaving off the excess has meant removing the customer referral program that was too costly that included benefits like half a year of free charging.

Part of this also has to do with Tesla losing their tax credit at the end of the year as well as giving more impetus to trimming costs.

Becoming a mass-market car manufacturer means it is important to price the car at affordable price points and that will be extremely difficult.

The goal is to deliver a $35,000 e-car that performs comparably to the rest of the fleet but produced with 7% less hands.

Can Musk do it?

I wouldn’t bet against him.

Musk means business and is hellbent for revenge against his arch enemies – the Tesla short community who he has habitually dragged under the bus through the media.

Piggybacking on this tougher profit-making climate is Boston-based finance company State Street Corporation’s (STT) announcement reducing headcount by 1,500 amounting to 6% of the global workforce.

The firm cited the urgent need to automate processes that will give the company a bigger foothold into the digital sphere.

The same theme was echoed at BlackRock Inc. (BLK), the world’s largest asset manager, who will eliminate 3% of its global workforce, or 500 people, amid an existential threat from the temporary ineffectiveness of passive investing.

In a rising market, it is guaranteed that assets at these types of funds almost always go up.

However, with an injection of recent volatility, passive investors have seen their balances dwindle with the market spawning abrupt outflows.

The need to zig and zag with the market is now painfully obvious and using technology to plug in the gaps will be cheaper and more appropriate for late cycle price action.

This is a suitable segue way into the third point – the fluid follow-through of the digital migration and the debacle of Sears prove my point.

Hedge fund manager Eddie Lampert and his firm ESL have navigated this famous American retailer into the ground.

This is what happens when the entire retail industry goes online when you don’t.

To make matters worse, Lampert has probably never set foot into his own investment.

Each time I roam the aisles of Sears, it’s about as crowded as a mortuary at midnight – an elementary story of a mismanaged enterprise.

Sears is an example of digital ignorance and it’s not the only one.

Gymboree Group, the baby clothing company, is another one to put on the list – the firm filed for Chapter 11 bankruptcy protection.

The company will close more than 800 Gymboree and Crazy 8 stores, this is the second time they have filed for bankruptcy protection in the past two years.

Unsurprisingly, the firm cited a sudden decrease in mall traffic and a surge in online alternatives as the reason for the economic softness.

The economy does not operate in a vacuum and any analog company who voluntarily misses the pivot to digital is voluntarily digging their own grave.

These three trends will only become more exaggerated moving forward threatening companies like Apple who fail to innovate after more than a decade of selling the same product, other companies don’t have the balance sheets to handle the same weakness.

 

 

 

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2019-01-22 01:06:142019-01-21 18:19:12How to Play Technology Stocks in 2019
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